IRA withdrawal penalty

[corn18]

Example:

I contribute $5,500 for me and $5,500 for my wife each year to a traditional IRA. None of the contributions are tax deductible due to income limits. So all of it is post tax.

Question:

If I withdraw any of the money before 59 1/2, is it subject to the 10% penalty and/or income tax? I assume any gains would be subject to both, but since I paid taxes already on the money going in, it should not be subject to income tax on the way out. Not sure about the 10% penalty, though.

The IRS code I could find didn't have anything that distinguished between pre-tax and post-tax contributions.

Thanks,

Tom

[kork13]

Without digging through the IRS pubs on it, I honestly don't know. However, I would suggest that you just take them & recharacterize them as Roth IRAs (the "Backdoor Roth"). You would owe regular income taxes on any gains you've already had since they your contribution (no penalty in the conversion)... But since you've already added the money to a non-deductible IRA, why not just go the next step to make their earnings tax free going into the future? Plus, as Roth IRAs, there would be no taxes/penalties on withdrawing your contributions.

[creditcardfree]

Yes, you still owe the penalty if you are less than 59 1/2 at the time of withdrawal.

[dczech09]

You can pull out your contributions at any time. Since you already paid your taxes on your contributions, the government will not "double tax" you.

As for the investment earnings-
You can pull out the earnings if you have had the account for at least 5 years AND under the following circumstances...
- You are 59 1/2 year of age or older
- Death or permanent disability (if you pass away, the beneficiary can take the money out)
- First time home purchase (limited to $10,000)

[disneysteve]

You can pull out your contributions at any time.

Is that true for traditionals or just for Roths?

[KTP]

Are you backdooring those non-deductible contributions to Roths?

We are in the same situation...income too high to contribute directly to a Roth, so for my wife we contribute $5500 to a Vanguard IRA and invest it in a money market account for a month or so, then we decide to take advantage of the IRA to Roth conversion the IRS now allows any income level, and we pay tax on the gains during that month. It is pretty easy to calculate the tax you owe on the conversion in this case. $5500.02 balance in Feb, basis from contribution in Jan $5500, gain $0.02, round to nearest dollar, send IRS check for $0, now have $5500 added to Roth.

For me we contribute $5500 to a traditional IRA but don't convert because I made the mistake of investing my tiny IRA rollover in 2001 and have grown it to over $50,000 from less than $2000 in 13 years. Thus I would owe significant tax doing a conversion.

Sorry for not answering your original question but wanted you to be aware of how to get money into a Roth if you don't directly qualify.

[corn18]

I really like the backdoor Roth idea. That fits my situation perfectly. Will do that. Once it is converted, is there a penalty for withdrawing early from the Roth?

[KTP]

I really like the backdoor Roth idea. That fits my situation perfectly. Will do that. Once it is converted, is there a penalty for withdrawing early from the Roth?

After five years there is no penalty for withdrawing the amount you converted to the Roth and you do not have to pay tax on that amount.

Example:

You convert a traditional IRA of $5500 with a $5500 basis into a Roth in 2014. The Roth now has $5500. Over the next 5 years it grows to $10,000. In late 2019 you withdraw $5500 from the Roth leaving the $4500 in gains. You owe zero tax and zero penalty on this withdrawal.

[Petunia 100]

Yes, you will be subject to penalty if you make early withdrawals from your traditional IRA. (However, you can choose to elect 72t rules and avoid the penalty.) But not on the non-deductible portion. See page 59, right-hand side http://www.irs.gov/pub/irs-pdf/p590.pdf

Since your contributions are non-deductible, you should consider converting to Roths. Unless you have significant deductible contributions sitting in traditional, Simple, or SEP IRAs, there's really no reason not to convert.

Conversions to Roths are available for withdrawal without penalty after 5 years.

[Petunia 100]

You can pull out your contributions at any time. Since you already paid your taxes on your contributions, the government will not "double tax" you.

As for the investment earnings-
You can pull out the earnings if you have had the account for at least 5 years AND under the following circumstances...
- You are 59 1/2 year of age or older
- Death or permanent disability (if you pass away, the beneficiary can take the money out)
- First time home purchase (limited to $10,000)

Incorrect. Please note tomhole states he is contributing to a traditional IRA.

[dczech09]

Incorrect. Please note tomhole states he is contributing to a traditional IRA.

My apologies. I was thinking the Roth IRA.