Traditional IRA withdrawal questions?

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coopville
Posts: 4
Joined: Fri Dec 06, 2013 4:20 pm

Traditional IRA withdrawal questions?

Post by coopville » Tue Dec 30, 2014 3:10 pm

We made a non deductible contribution to one of my wife’s TIRA accounts in the 2013 tax year. This account contains only a non-deductible contribution and some small earnings. We had hoped that we would be able to set up a 401k plan at her company and take advantage of the backdoor roth ira conversion for this money. Unfortunately, it wasn’t economically viable at this time but might be in the next 2-5 years.

My questions: Is it possible to withdrawal the contribution and earnings from this non-deductible TIRA account? She is in her mid 40’s and has additional deductible TIRA accounts scattered about. My thought is that this money would be better in a non retirement account to take advantage on Long Term capital gains taxes rather than pay ordinary income taxes when withdrawn from the TIRA. We don’t expect to be in a lower tax bracket in retirement. I realize we could just leave it where it is and do the backdoor roth conversion when / if it becomes viable to set up a 401k plan at my wife’s company. Just not sure if that will happen or not.

If we did withdrawal this money, how would the money be taxed? Just on the earnings? Would we be subject to the prorata rules with all her other deductible TIRA accounts for taxation? Would the 10% penalty be applied to just the earnings or earnings and contributions?

Thanks so much!

Coop

kaneohe
Posts: 4994
Joined: Mon Sep 22, 2008 12:38 pm

Re: Traditional IRA withdrawal questions?

Post by kaneohe » Tue Dec 30, 2014 4:25 pm

taxed prorata and 10% penalty on taxable amount assuming you are not old enough and don't meet requirements for exception

Alan S.
Posts: 7739
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Traditional IRA withdrawal questions?

Post by Alan S. » Tue Dec 30, 2014 5:40 pm

As Kaneohe said, plus the deadline for withdrawing JUST the 2013 contribution and its earnings expired 10/15/2014. That is when pro rating using all her non Roth IRAs kicked in for any distributions taken. Sounds like any distribution would be mostly taxable plus penalty on the taxable portion of the distribution.

Could be the best option is to just wait to see if she either gets the 401k in a couple years or ends up working somewhere else that has a plan that will accept IRA rollovers of pre tax IRA amounts. Then the basis amount of her IRA can be converted tax free.

There is another possibility - if you are in a situation where your current tax rate appears to be less than (or in some cases equal to) your expected marginal rate in retirement, the spouse with the highest % of basis in their IRA could just start converting incremental amounts each year that do not inflate your current bracket. Being eligible for a back door Roth does not mean that some people are not in a position where they should convert some pre tax dollars in addition. It is just that converting pre tax amounts is not the no brainer that doing tax free conversions is.

kaneohe
Posts: 4994
Joined: Mon Sep 22, 2008 12:38 pm

Re: Traditional IRA withdrawal questions?

Post by kaneohe » Tue Dec 30, 2014 5:53 pm

Alan,is the recharacterization deadline dependent on the tax yr for which a contribution is made or the year in which a contribution is made....
that is, a contribution for 2013 could be made in 2013 or 2014........is the deadline the same for both since they are for tax yr 2013 or is it different because
of the yr in which the contribution is actually made.?

chaz
Posts: 13601
Joined: Tue Feb 27, 2007 2:44 pm

Re: Traditional IRA withdrawal questions?

Post by chaz » Tue Dec 30, 2014 6:17 pm

Look at IRS Pub 590.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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