MAY I LIQUIDATE OUR ROTH ACCOUNTS WITHOUT PENALTY?

OK, THIS MAYBE A VERY NOVICE QUESTION BUT MY WIFE AND I EACH HAVE A SMALL ROTH IRA LOCATED IN A WELLS FARGO BROKERAGE ACCOUNT. THE APPROXIMATE BALANCE IN EACH IS ABOUT $4K. WE ARE VERY MUCH WANTING TO LIQUIDATE THESE ACCOUNTS TO PAY OFF REVOLVING DEBT. IS THERE ANYWAY TO RE-CHARACTERIZE THESE FUNDS OR THE ENTIRE ROTH ACCOUNT INTO A REGULAR BROKERAGE ACCOUNT? NEITHER ACCOUNT HAS EARNED MONEY AND IN FACT WE ARE BOTH DOWN IN PRINCIPLE OVER $2K EACH.

THANKS SO MUCH FOR THE GUIDANCE AND INSIGHTS AS BOTH ARE GREATLY APPRECIATED.



You can always take out the money that you put into the Roth accounts without penalty.



Excellent, did not know that. Many thanks!



If these are your only Roth IRA accounts and you each contributed 6k originally, you may also qualify for a misc deduction for your loss. All of your Roth IRAs must be fully distributed. To get the deduction you must be able to itemize deductions. In addition, only amounts in excess of 2% of your AGI can be deducted.
Eg 75,000 AGI
2% of 75k = 1,500
4,000 loss less 1,500 = 2,500 misc itemized deduction.

Even though your distributions will be tax and penalty free, you must report them on an 8606 for each of you.
If these are NOT your only Roth IRA accounts, please advise.



[quote=”[email protected]“]If these are your only Roth IRA accounts and you each contributed 6k originally, you may also qualify for a misc deduction for your loss. All of your Roth IRAs must be fully distributed. To get the deduction you must be able to itemize deductions. In addition, only amounts in excess of 2% of your AGI can be deducted.
Eg 75,000 AGI
2% of 75k = 1,500
4,000 loss less 1,500 = 2,500 misc itemized deduction.

Even though your distributions will be tax and penalty free, you must report them on an 8606 for each of you.
If these are NOT your only Roth IRA accounts, please advise.[/quote]

Hi Alan, thank you so much for the guidance and information. I also have a 401K plan through my employer that I contribute to each pay period part of which is allocated as a ROTH. Does this answer your question? So, if I liquidate the 2 small ROTH accounts is there any special paperwork I need to fill out to protect against taxes or penalties. (I don’t believe either account has appreciated in value)



You do not have to touch the 401k or Roth 401k account since they are not IRAs.

If you close out your Roth IRAs, even though there will be no taxes due, you must report the distribution on Form 8606, one Form 8606 for each of you if you both close out your Roth IRAs.

For example, each Form 8606 would show that you distributed 4,000 or whatever exact amount was in your Roth IRA. Then the form asks for the total amount of your Roth IRA regular contributions and conversion contributions. If you each made regular contributions totalling 6,000, you would show the 6,000. I assume you made no Roth conversions. The result is that you would owe no tax or penalty. Line 15a of your tax return would show 8,000 (total you both received) and line 15b would show -0-.

If it turned out that either of these Roth IRAs had a gain, only the amount of the gain would be taxable and subject to penalty.



Spot on! Alan, this is exactly the information I was looking for. Thank you for your willingness to clarify these issue. I feel like I should send you a payment or something! 🙂

Thanks again.

Jim



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