[Sean]

Please help! My son withdrew $2000 from his Roth IRA account this past year when he was in a financial hardship to pay for auto repairs.

He had well over that amount in deposits in previous years. He is now doing his taxes and the Fidelity tax form has this classified as a ‘J’, meaning ‘early distribution’.

It had been widely stated all over the place that you can, at any time, for any reason withdraw your contributions to a Roth IRA-just not any of the earnings on it (those would be subject to the 10% early withdrawl and W2 taxes).

What is correct? Where do I find the details to help him correctly file this and document it so he doesn’t get ‘double taxed’ on the money he needed to pull out for his personal emergency?

I appreciate all help as this is frustrating and stressing us out.

[Teresa]

I believe the form he needs to fill out is Form 8606. Should be available to him at the brokerage his Roth is at.

Simply states the amount of cash pulled out of contributions. Been a few years since my d did this.

Hope this helps.

[Evan]

I had this problem in Taxact. I had to manually search for 8606 form and enter information there.

Once I did, it fixed the “early distribution tax” and automatically increased my refund amount.

[Joel]

Your son needs to complete Part III of Form 8606 𝗔𝗡𝗗 he needs to check that Part I of Form 5329 is correct as well.

If he is using tax software or an online tax tool, how these forms get completed may be specific to the software.

Part III of Form 8606 is used to calculate how much of the Roth IRA distribution is taxable as ordinary income.

Part I of Form 5329 calculates how much of his distribution is subject to early withdrawal penalties.

Note that a Roth IRA distribution can include dollars that are subject to early withdrawal penalties even though those dollars may not be subject to ordinary income taxes.

On Form 8606 Part III, he will need to enter the sum of all of his prior contributions to his Roth IRA on Line 22.

If he has taken out contributions before, this number should be net of those distributions. Line 24 is his basis in conversions.

This includes rollovers from employer sponsored retirement plans 𝗔𝗡𝗗 Roth conversions, including rollovers that converted to Roth.

It does not include rollovers from one Roth IRA to another – the IRS views all of his current and past Roth IRAs as a single Roth IRA.

Ultimately this part of the Form produces a taxable amount on Line 25c. If everything was done correctly, it should be zero.

On Form 5329, Part I, should contain zeros on Lines 1 & 2. Line 1 is the number from Form 8606, Line 25c plus any “recapture amounts” from taxable Roth conversions and rollovers performed in the past 5 tax years – see the instructions for details.

Since everything should be covered by his contributions, these numbers should come out to zero – but it best if he checks the Form to make sure he didn’t confuse the tax software.

Note: Some tax software may actually track your basis in Roth contributions and conversions from year to year – but it would be smart for you to double check.

[Jeff]

You can withdraw your contributions at any time. No tax no penalty. Is he using tax software to do his taxes?

Of course it’s an early distribution, but there should be someplace to check that it was contributions and not earnings so that it handles it correctly.

[Keith]

So, if the start of the ROTH was less than 5 yrs, there is a penalty. Please check me if I’m wrong. This is how we learn.

Also, I don’t recall that car repairs is considered a hardship.

[Jerita]

I thought you had to be 59 and had the account 5 years in order to withdraw anytime.

I may be wrong.

[Author]

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