6 ms·

I wonder about the Roth IRA deadline, since some people aren't sure whether they're above the cutoff until they do at least some of the calculations.

slg 7y ago
A nice benefit of Roth IRAs is that you can remove your contributions (not profits) without penalty. You can always contribute it now, leave it in cash so it is liquid, and then withdraw it if necessary at a later date.
- orblivion 7y ago
  Awesome thank you.
- frei 7y ago
  It will be liquid, but it will still have attributable gains if the account value increases. That amount will also need to be removed, which will come from previous contributions, before your actual tax deadline, which may be extended to October. Just a heads up.
  - henriquez 7y ago
    > if the account value increases. Kind of a big if for any retirement account right now unfortunately. But yeah, you would only pay a 10% early distribution penalty on any gains.
  - lyrrad 7y ago
    This is incorrect. Withdrawals from Roth IRAs follow particular ordering rules and one can withdraw direct contributions without a 10% penalty or tax. In general, direct contributions are taken out first, followed by conversions, followed by earnings. (For the exact rules, including more details on withdrawal ordering of conversions I'd recommend researching Roth IRA withdrawal ordering. Note that the rules for accounts like Roth 401k are different.) Direct contributions are not subject to tax or penalty when withdrawn, so if one can always withdraw their total direct contributions without tax or penalty from a Roth IRA, while leaving earnings in the account. Withdrawing taxable portions of conversions or earnings may result in tax and/or a 10% penalty, depending on ones circumstances.
    - soared 7y ago
      Doesn’t your last sentence contradict the rest of your post? You get taxed any time you withdraw something from a Roth, since you invested it pre-tax.
      - drdec 7y ago
        No, a Roth IRA is funded with post-tax money. A traditional IRA is funded with pre-tax money. Once you reach the correct age, money coming out of a Roth IRA is not taxed. Money coming out of a traditional IRA is taxed. As GP noted, contributions to a Roth IRA may be withdrawn at any time without penalty or taxes. The gains from those contributions follow different rules however. E.g. Suppose you put in $1000 to a new Roth IRA account with no other contributions. Suppose the account is worth $1500 today. You may withdraw the $1000 you put in with no penalties or taxes leaving $500 in the account.
    - frei 7y ago
      My point wasn't about withdrawal ordering. I'm not saying you can't withdraw the direct contributions first without penalty. I'm saying, the law doesn't care that you left the part you over contributed uninvested, and that it was some other money in the account that grew. I'm saying, to avoid penalty, you have to withdraw (direct contributions first) equal to [excess * (current value/value at date of excess contribution)]. This amount could be higher or lower than what you contributed, depending on how the existing Roth IRA investments in the account changed in value between the time of excess contribution and the withdrawal.
    - liuhenry 7y ago
      You're both correct but talking about different situations. The original post is saying that some people may discover they've contributed too much to their IRA after doing the tax calculations (say, if they just contribute the max $6k now). If this happens, you're subject to a 6% penalty unless you withdraw the excess along with "net attributable" earnings. These earnings are subject to the 10% early withdrawal penalty in addition to the normal income tax, and are calculated as a prorated portion of the entire IRA growth.
  - loeg 7y ago
    If it is in cash, as grandparent post described, it will not have meaningful gains. "De minimis."
benmanns 7y ago
You can contribute to a non-deductible traditional IRA, then roll over to a Roth IRA regardless of income thresholds.
- loeg 7y ago
  With the big, big caveat that this has tax implications if you have any other traditional IRAs. If you don't have t.IRAs — great, do it. If you do have t.IRAs, you should read about "pro rata" and consider rolling your former t.IRA into a 401(k) (employer or individual) before making so-called backdoor Roth IRA contributions.
xxpor 7y ago
The IRA deadlines are automatically moved as well: IRC 219(f)(3): Time when contributions deemed made. For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

slg 7y ago

A nice benefit of Roth IRAs is that you can remove your contributions (not profits) without penalty. You can always contribute it now, leave it in cash so it is liquid, and then withdraw it if necessary at a later date.

orblivion 7y ago
Awesome thank you.
frei 7y ago
It will be liquid, but it will still have attributable gains if the account value increases. That amount will also need to be removed, which will come from previous contributions, before your actual tax deadline, which may be extended to October. Just a heads up.
- henriquez 7y ago
  > if the account value increases. Kind of a big if for any retirement account right now unfortunately. But yeah, you would only pay a 10% early distribution penalty on any gains.
- lyrrad 7y ago
  This is incorrect. Withdrawals from Roth IRAs follow particular ordering rules and one can withdraw direct contributions without a 10% penalty or tax. In general, direct contributions are taken out first, followed by conversions, followed by earnings. (For the exact rules, including more details on withdrawal ordering of conversions I'd recommend researching Roth IRA withdrawal ordering. Note that the rules for accounts like Roth 401k are different.) Direct contributions are not subject to tax or penalty when withdrawn, so if one can always withdraw their total direct contributions without tax or penalty from a Roth IRA, while leaving earnings in the account. Withdrawing taxable portions of conversions or earnings may result in tax and/or a 10% penalty, depending on ones circumstances.
  - soared 7y ago
    Doesn’t your last sentence contradict the rest of your post? You get taxed any time you withdraw something from a Roth, since you invested it pre-tax.
    - drdec 7y ago
      No, a Roth IRA is funded with post-tax money. A traditional IRA is funded with pre-tax money. Once you reach the correct age, money coming out of a Roth IRA is not taxed. Money coming out of a traditional IRA is taxed. As GP noted, contributions to a Roth IRA may be withdrawn at any time without penalty or taxes. The gains from those contributions follow different rules however. E.g. Suppose you put in $1000 to a new Roth IRA account with no other contributions. Suppose the account is worth $1500 today. You may withdraw the $1000 you put in with no penalties or taxes leaving $500 in the account.
  - frei 7y ago
    My point wasn't about withdrawal ordering. I'm not saying you can't withdraw the direct contributions first without penalty. I'm saying, the law doesn't care that you left the part you over contributed uninvested, and that it was some other money in the account that grew. I'm saying, to avoid penalty, you have to withdraw (direct contributions first) equal to [excess * (current value/value at date of excess contribution)]. This amount could be higher or lower than what you contributed, depending on how the existing Roth IRA investments in the account changed in value between the time of excess contribution and the withdrawal.
  - liuhenry 7y ago
    You're both correct but talking about different situations. The original post is saying that some people may discover they've contributed too much to their IRA after doing the tax calculations (say, if they just contribute the max $6k now). If this happens, you're subject to a 6% penalty unless you withdraw the excess along with "net attributable" earnings. These earnings are subject to the 10% early withdrawal penalty in addition to the normal income tax, and are calculated as a prorated portion of the entire IRA growth.
- loeg 7y ago
  If it is in cash, as grandparent post described, it will not have meaningful gains. "De minimis."

benmanns 7y ago

You can contribute to a non-deductible traditional IRA, then roll over to a Roth IRA regardless of income thresholds.

loeg 7y ago
With the big, big caveat that this has tax implications if you have any other traditional IRAs. If you don't have t.IRAs — great, do it. If you do have t.IRAs, you should read about "pro rata" and consider rolling your former t.IRA into a 401(k) (employer or individual) before making so-called backdoor Roth IRA contributions.

xxpor 7y ago

The IRA deadlines are automatically moved as well: IRC 219(f)(3): Time when contributions deemed made. For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).