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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3998
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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In April I contributed $5,000.00 to a traditional IRA for 2012.

Resolved Question:

In April I contributed $5,000.00 to a traditional IRA for 2012. Due to a medical/physical condition I was not able to find new employment, and originally I lost my job due to a medical condition. I wound up withdrawing the money from the traditional IRA, but did not consider at the time I had recently contributing to the IRA. I did not even recall that I had apparently withdrawn to a zero balance. I did reinvest the money into a Money Market IRA at a local bank within 60 days. What will the tax consequence be regarding the 5k I withdrew without thinking? Also, what would the tax consequence be if I over-withdraw from a ROTH IRA as I need the money for medical insurance and bills? Does what I did with a traditional IRA this year have anything I do regarding the ROTH IRA?
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

Lane :

Hi, as long as you reinvested into another traditional IRA within the 60 day time frame, it will count as a rollover and there's no penalty and no tax

Lane :

Here's a chart that shows ALL of the retirement accounts that can be rolled over (one account to another) ... If you'll note: the traditional IRA on the "Roll From" side of the chart is "rollable" to a traditional IRA on the "Roll To" side of the chart with no restrictions

Lane :

The IRS says "If the distribution from the qualified plan or IRA is paid to you, you have 60 days from the date of receipt to roll it over to another qualified plan or IRA." See this: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Rollovers-of-Retirement-Plan-Distributions

Lane :

So, no tax consequences there

Lane :

ON the Roth, you can always withdraw the principal (contributions mad from already taxed dollars) with no tax ramafications

Lane :

And finally, the traditional and IRA issues here aren't related at all

Lane :

Hope this helps

Lane :

Laned

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)

Lane :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Expert:  Lane replied 11 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 11 months ago.

Hi Diane,

I never saw you come into the chat, so I wanted to make sure you saw this, and know that you can come back here, if you have any questions at all.

Let me know

Lane
Customer: replied 11 months ago.

If someone is not able to work due to a disability and they withdraw money from a ROTH IRA that goes beyond the amount of their contributions, and they have a note from their doctor regarding their inability to work, what are the tax consequences?

Expert:  Lane replied 11 months ago.
You also won't pay a penalty if you:

* Use the distribution for a first-time home purchase -- up to a $10,000 lifetime limit

* Qualify for other exceptions that apply to traditional IRAs


And for Traditional IRAs:


Medical bills -- You might use money to pay unreimbursed medical expenses that are more than 7.50% of your adjusted gross income (AGI). If you do, you won't pay a penalty.


If you’re age 65 or older, the threshold is only 7.5% of AGI.

Medical insurance -- You might receive unemployment wages for part of the year and meet certain conditions. If so, you'll pay no penalty on IRA distributions. However, you must use them to pay for medical insurance to cover:
You
Your spouse
Your dependents

So it depends on how much is there over and above the AGI limit.

Lane
Customer: replied 11 months ago.

Are you saying the same exceptions that apply to a traditional IRA would apply to a ROTH IRA? If there was a qualifying letter regarding disability from the doctor and someone withdraws beyond the contribution amount from a ROTH IRA, what is the tax consequence to the amount withdrawn that was not contributions. At this point I have zero earned income this year, although there would be a little income from a traditional IRA, although I had taxes withheld just in case, even though the doctor had provided a letter after I called the IRA and had them explain the law.

Expert:  Lane replied 11 months ago.

Yes they do.

Same rules exactly.

Lane


Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3998
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 9 other Tax Specialists are ready to help you
Expert:  Lane replied 11 months ago.
Hi Diane,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
Customer: replied 11 months ago.

Your answer did help. I have a related question though. How many letters in one year does someone need for the IRS to show someone needs the money due to a long indefinite period of being unable to earn a substantial and gainful living for health reasons? I am not sure I will be able to earn any pay this year, but that remains to be seen. For easy math though, assuming I had zero taxable income this year, would that mean all medical expenses paid by my IRA money would avoid the tax penalty?

Expert:  Lane replied 11 months ago.

One letter (for any one tax year) will do, as the IRS looks at each tax year separately.

Although having the WORDING of that letter indicate that the condition may linger for an extended or indefinite period will always help.

And, yes, on the 10% as long as you are considered disable the penalty is waived regardless.

Customer: replied 11 months ago.

Are you saying if I had a letter in May, I do not need to get another letter for this year if an IRA withdrawal was made after May?

Expert:  Lane replied 11 months ago.

If they have even one letter for the tax year in question, I would wait until (IF you ever) get a request for more documentation.

Again, once IRS puts an issue to before for a tax year in question, it's done ... and then everything starts all over for the next tax year.

I would Keep my latest and/or best example from each tax year in a file with the other documents for that some year.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3998
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 9 other Tax Specialists are ready to help you
Expert:  Lane replied 11 months ago.

Thanks Diane.

Given your situation, and number of ways you COULD document it if requested, I think you'll be fine.

Thanks again,
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3998
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 9 other Tax Specialists are ready to help you

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