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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16576
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I received a CP2000 notice telling me that I didnt report

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I received a CP2000 notice telling me that I didn't report income in 2011. In 2011, I contributed 5k in my Roth IRA and in my wife's IRA. Later, when I was doing by taxes using HRBlock software, I found out that I over contributed so I withdrew 3410 from each account. The notice tells me that those amounts should be considered taxable income. How is that possible if that money was pulled from a Roth IRA that contains "after tax" money?

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

How old were you when you took the distribution from the Roth IRA, and for what purpose did you take the distribution?

MyVirtualCPA :

Distributions are tax free only if they are qualified distributions

MyVirtualCPA :

A qualified distribution meets both of the following two categories of requirements:

1. It occurs at least five years after the Roth IRA owner established and funded his or her first Roth IRA

2. It is distributed under one of the following circumstances:



  • The Roth IRA holder is at least age 59.5 when the distribution occurs.

  • The Roth IRA holder becomes disabled before the distribution.

  • The beneficiary of the Roth IRA holder receives the assets after his or her death.

  • The distributed assets will be used toward the purchase or rebuilding of a first home for the Roth IRA holder or a qualified family member. This is limited to $10,000 per lifetime. Qualified family members include the following:

    • the Roth IRA holder

    • the Roth IRA holder's spouse

    • the children of the Roth IRA holder and/or his or her spouse

    • the grandchild of the Roth IRA holder and/or his or her spouse

    • the parent or other ancestor of the Roth IRA holder and/or his or her spouse



Customer:

I was 38. I was under the impression that I could withdraw contributed amounts as long as I didn't withdrawl profits.

MyVirtualCPA :

No, it has to be a qualified distribution. You have to make the distribution at least 5 years after you set up your first Roth IRA

MyVirtualCPA :

and it has to be under one of the qualified reasons

MyVirtualCPA :

Was the amount you took out your contributions to the plan?

Customer:

So I am taxed at the full income tax rate and not the capital gains rate

MyVirtualCPA :

If so, those can be taken tax free at any time

MyVirtualCPA :

Your original contributions can be taken at any time

Customer:

Yes, it was out of the contributions to the plan.

MyVirtualCPA :

Under the ordering rules, then you shouldn't owe tax on this amount. You will need to respond to the message and tell the IRS that your distribution was from participant contributions to the plan

Customer:

That is what I thought. Is that the language I should use on the response?

MyVirtualCPA :

Yes, include a copy of your 1099-R

Customer:

Should the 1099-R have to have that language..I think it just says I took a withdrawal?..thanks for your help BTW

MyVirtualCPA :

No problem. The 1099-R is just for their information. They will want to see it.

Customer:

Okay...thanks!!!!

Customer:

I am trying to rate you but it won't let me

MyVirtualCPA :

Oh I'm sorry I had a setting on

MyVirtualCPA :

When I am just talking, I have it set so you can't until we're done. but, I believe if you are satisfied we are complete.

MyVirtualCPA :

I turned it off you can rate now.

Customer:

Okay..thanks again. XXXXX Glad I googled this

MyVirtualCPA :

Here's a good article to read on the topic, too; http://www.investopedia.com/articles/retirement/04/042804.asp

MyVirtualCPA :

Glad you stopped by too

Megan C and other Tax Specialists are ready to help you

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