Tax Experts
Paying Tax on a Roth IRA Withdrawal
By Kevin McCormally, Editorial Director, Kiplinger.com
March 25, 2008
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Q: I had an accident and separated my shoulder. I did not have insurance at the time. . . . I had to cover the doctor expense. In order to do so, I had to withdraw money from my Roth IRA. I also withdrew enough to live on [during recovery].
The doctor bill was $5,000 and the living expense was $7,000.
Being that the Roth IRA is funded with after-tax dollars, why would I be charged a penalty to use these funds? Am I misinterpreting the rules? Also, can I write-off the living expense ($7,000) due to inability to work during recovery? -- Michael, Celina,OH
Kevin's Answer:
Sorry about the accident, but I do have some good news on the tax front.
You can withdraw your contributions from a Roth IRA at any time with no tax and no penalty. And, the first money that comes out of a Roth IRA is considered a return of your contributions. So if the $12,000 you withdrew from your Roth was less than the amount you had contributed over the years, you owe neither tax nor penalty on any of it. You'll need to include a Form 8606 with your return to show that the payout was not taxable.
If you did withdraw more than you had contributed the earnings are taxed, but there is no penalty on funds that went to pay medical bills that exceeded 7.5% of your adjusted gross income for the year.
The money you spent on living expenses is not deductible, nor does it qualify for this exception to the 10% penalty.
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Reader Comments (1)
Posted by: dederd at 01/24/2009 06:43:58 PM
You recently had an article on this very topic which I cannot find. I withdrew money from my Roth before reaching 59 1/2 but the 1099-R block 2 says taxable amount not determined and a "J" is entered in Block 7. HOw do I explain this on my return?