Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Closing Roth IRA - Tax Liability?

Reply to topic
Money Talk > Taxes

Author Thread
p0wder2
New Poster


Cash: $ 0.45

Posts: 2
Joined: 10 Apr 2013
Location: Phoenix, AZ
Closing Roth IRA - Tax Liability?  Reply with quote  

Hello, I'm Ryan.

So...I had a 401k for a brief period of time at my old job, lost my old job, amount was less than $1k, employer opted for mandatory distribution. I opted for rollover to Roth IRA, put money in short term deposit sweep until I could figure out how to invest...easy peasy. Already filed last years taxes and paid liability on the rollover. Well, life happened and now I need the money. I am closing the account entirely with a full distribution and since I never invested it, the total balance of the account has increased a measly $0.03.

It's my understanding that this should be a "Return of Basis" and thus will have zero tax liability (except maybe on that extra $0.03), regardless of any other rules that apply to Roth IRAs like early withdrawal, 5-year thing, etc. Just want to check and make sure this is correct as I am unsure if the fact that the initial (and only) deposit being a 401k rollover last year will change the tax liability somehow. Please let me know. Much appreciated, thanks!
Post Wed Apr 10, 2013 1:26 am
 View user's profile Send private message
p0wder2
New Poster


Cash: $ 0.45

Posts: 2
Joined: 10 Apr 2013
Location: Phoenix, AZ
Never Mind  Reply with quote  

With some additional reading and help in another forum, I figured it out:

The entire distribution will be subject to 10% penalty due to rollover/conversion amount not being held for more than five years (even though it would normally be considered return of basis if it were a normal annual contribution). However, only earnings will be taxed as income since amount up to original deposit is Return of Basis as far as normal Roth IRA tax rules are concerned.

Example:

Original rollover = $XXX.59
Balance at close = $XXX.62
Rollover - Balance = Earnings = $000.03

$XXX.62 = 10% tax = XX.06
$000.03 = Income tax (at say 15% income tax bracket) = $0.01 (rounded up)

XX.06 + 00.01 = XX.07 = Total tax liability.

Just thought I'd post all that in case somebody came across this thread finding themselves in a similar position. Also, the following link helps:

http://www.fool.com/money/allaboutiras/allaboutiras07.htm <-- Good examples!
Post Wed Apr 10, 2013 6:43 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

And since tax amounts are rounded to the nearest dollar, you can enter that in your tax return as $0. Smile

~Tim~
Post Thu Apr 11, 2013 2:59 am
 View user's profile Send private message

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016