Tax Preparation & Planning

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Monthly Archives:February 2018

BySteve

Are Withdrawals from a Roth IRA Taxable?

Have you taken money out of a Roth IRA? At this time of year, it  is common for tax preparation clients to ask me about Roth IRAs and taxes. So, are withdrawals from a Roth IRA taxable?

Let’s say you withdrew $10,000 from a Roth IRA and you’re trying to prepare your taxes on your own. How do you calculate the taxable amount if any?

Before I can answer this, we need to know some of the background. So let’s meet Dan.

Dan has had a Roth IRA account for three years. He withdrew $10,000 from this account to pay off some debt. He was taxed on 10% of the total amount, which left him a balance of only $9,000. Currently, Dan lives in Texas which has no state income taxes. He received a Form 1099-R showing a taxable amount in Section 2A of the form as blank. How can he calculate the taxable amount? His 1099-R form has his prior Washington, DC address, but as a member of the military he has been relocated to Texas now.

Boston Tax Planner Answer:

You only pay taxes on the gains above what you invested. Your initial and subsequent investments into the Roth IRA form your basis. I recommend that you go back to your statements to calculate the amount of your investments. If you need help, reach out to the investment custodian (the folks who prepared the 1099). They should also be able to tell you what the amount invested was.

It’s possible that you have no taxable gain and this is why there is no taxable amount listed on the 1099. For example, if you invested $10,000 and withdrew $1,000, then for tax purposes you received a partial return of your principal. There is no tax on this in a Roth IRA.

When you contact the custodian you should update your address information. But it should not be a problem for filing your federal income taxes. Since you live in Texas where there is no state income tax, you shouldn’t have to worry about that either. Whether or not you need to file a different state tax return will depend on which state and how long you lived there.

If you are like Dan and need help with your taxes, please contact Steve Stanganelli, CFP(r) at BostonTaxPlanners.com.