Best course of action to withdraw Roth IRA contribution?

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SpecimenTwo
Posts: 2
Joined: Sun Feb 11, 2018 11:45 pm
Location: Honolulu, HI

Best course of action to withdraw Roth IRA contribution?

Post by SpecimenTwo » Mon Feb 12, 2018 12:21 am

Hi all,

First post ever on Bogleheads! How sad it relates to a stupid error on my part, rather than me proclaiming my total fealty and love to John C. Bogle. Bitter, bitter!

Anyway. I have a dilemma of my own making concerning my recently established Vanguard Roth IRA:

I spent most of 2017 in a technically unemployed status: volunteering on a remote Hawaiian island doing bird and plant work for six months. Fun job, but zero dollars earned.

Since mid-October 2017, I've worked as a lowly intern for the state government here, earning a grand total of $3,006.85 net pay (according to my pay stub, as I have yet to look at my W-2.)

$3,006.85 is not $5,500, much to my chagrin. I found out only recently that you can't contribute more to a Roth IRA than you earned as regular income for a given tax year.

I'm under the impression I can ask Vanguard to withdraw the difference, but how does that work if my investment actually lost money? (Bought shares of Vanguard International Total Stock Index Admiral on Jan. 25 or so, then stocks took their tumble. Not trying to time the market or anything, I just wanted to get my 2017 contribution out of the way, as I'm starting this investing gig a little late...)

Side query: what's the logic behind this IRS rule? I'm learning the hard way that I should've made a Roth IRA years earlier (better late than never), but why does the IRS have to hold me back now that I'm playing catchup? I'm a bit perplexed why Uncle Sam is actively preventing me from investing my after-tax dollars toward my own retirement, considering I earned every penny, just prior to tax year 2017.

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FiveK
Posts: 5141
Joined: Sun Mar 16, 2014 2:43 pm

Re: Best course of action to withdraw Roth IRA contribution?

Post by FiveK » Mon Feb 12, 2018 12:07 pm

SpecimenTwo wrote:
Mon Feb 12, 2018 12:21 am
...earning a grand total of $3,006.85 net pay (according to my pay stub, as I have yet to look at my W-2.)
What do you mean by "net" pay?

The amount in W-2 box 1 (sometimes called "W-2 income" on pay stubs) is what will matter.

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

Re: Best course of action to withdraw Roth IRA contribution?

Post by Alan S. » Mon Feb 12, 2018 12:30 pm

I wouldn't do anything until you get your W-2. Your contribution is limited to the Box 1 amount.

Once you have that, you can request the corrective distribution of your excess contribution amount. The way the market is gyrating now, you could have a gain or loss on your contribution depending on when the distribution is processed. If a loss, you will get back less than the contribution and there will be no tax or penalty. If you have a gain, only the amount of the gain will be subject to tax and penalty in tax year 2018, because you made the contribution in 2018 even though it was for 2017. You probably would want to this by the end of March since you do not need to file a return for 2017 and therefore your deadline to remove the excess and avoid the 6% excise tax is 4/17 rather than 10/15.

IRA and qualified plan contributions have always had to come from earned income (technically taxable compensation). That said, if you already had a TIRA balance, you could convert unlimited amounts to a Roth IRA, particularly in a low income year. Of course, that is not coming from new contributions, but changes the tax status of your IRA to one in which taxes have been paid up front, but distributions will eventually be tax free.

NOTE: Your allowed contribution might be more than 3,007 since your net pay may include various deductions such as taxes and FICA/Medicare taxes, post tax insurance, etc. that reduce your net pay below your actual earned income.

delamer
Posts: 5474
Joined: Tue Feb 08, 2011 6:13 pm

Re: Best course of action to withdraw Roth IRA contribution?

Post by delamer » Mon Feb 12, 2018 8:12 pm

FiveK wrote:
Mon Feb 12, 2018 12:07 pm
SpecimenTwo wrote:
Mon Feb 12, 2018 12:21 am
...earning a grand total of $3,006.85 net pay (according to my pay stub, as I have yet to look at my W-2.)
What do you mean by "net" pay?

The amount in W-2 box 1 (sometimes called "W-2 income" on pay stubs) is what will matter.
Since you have a pay stub, it is gross pay that you need to look at. That determines your allowable contribution.

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FiveK
Posts: 5141
Joined: Sun Mar 16, 2014 2:43 pm

Re: Best course of action to withdraw Roth IRA contribution?

Post by FiveK » Mon Feb 12, 2018 9:23 pm

delamer wrote:
Mon Feb 12, 2018 8:12 pm
FiveK wrote:
Mon Feb 12, 2018 12:07 pm
SpecimenTwo wrote:
Mon Feb 12, 2018 12:21 am
...earning a grand total of $3,006.85 net pay (according to my pay stub, as I have yet to look at my W-2.)
What do you mean by "net" pay?

The amount in W-2 box 1 (sometimes called "W-2 income" on pay stubs) is what will matter.
Since you have a pay stub, it is gross pay that you need to look at. That determines your allowable contribution.
Careful.

The IRS treats as compensation...box 1...of Form W-2...reduced by...box 11.

Amounts deducted from gross pay for pre-tax insurance, HSA, 401k, etc. are not compensation for IRA purposes. Amounts withheld for federal and state tax, SS, etc. are included.

delamer
Posts: 5474
Joined: Tue Feb 08, 2011 6:13 pm

Re: Best course of action to withdraw Roth IRA contribution?

Post by delamer » Mon Feb 12, 2018 9:28 pm

FiveK wrote:
Mon Feb 12, 2018 9:23 pm
delamer wrote:
Mon Feb 12, 2018 8:12 pm
FiveK wrote:
Mon Feb 12, 2018 12:07 pm
SpecimenTwo wrote:
Mon Feb 12, 2018 12:21 am
...earning a grand total of $3,006.85 net pay (according to my pay stub, as I have yet to look at my W-2.)
What do you mean by "net" pay?

The amount in W-2 box 1 (sometimes called "W-2 income" on pay stubs) is what will matter.
Since you have a pay stub, it is gross pay that you need to look at. That determines your allowable contribution.
Careful.

The IRS treats as compensation...box 1...of Form W-2...reduced by...box 11.

Amounts deducted from gross pay for pre-tax insurance, HSA, 401k, etc. are not compensation for IRA purposes. Amounts withheld for federal and state tax, SS, etc. are included.

I was misinformed.

Thanks.

SpecimenTwo
Posts: 2
Joined: Sun Feb 11, 2018 11:45 pm
Location: Honolulu, HI

Re: Best course of action to withdraw Roth IRA contribution?

Post by SpecimenTwo » Tue Feb 13, 2018 2:30 am

Maybe I've been rushing myself a little bit here. Vanguard's website (among others) keeps saying if you've made an excess contribution that "you don't want to wait too long!" I'm starting to translate that as "you might want to take action before filing your taxes," rather than hearing this imaginary ticking clock whirring in the background, exclaiming the fiscal end is nigh.

I'll definitely wait until I see my actual W-2. My gross income is $3,600 for 2017 (bi-weekly $720 stipend). The number I provided earlier ($3006.85) is reported as "net income" according to my pay stub. But it's all moot until I see my W-2. (I was inclined to wait until I see the number the IRS uses, instead of just making an educated guess and perhaps screwing up again somehow. Since there's no immediate rush, I will definitely wait until I have my papers in order.)

I guess all said, the best scenario that could happen is the NAV of Vanguard Total International Stock Index approaches what I originally paid for it (NAV = $32.52), and I withdraw it then. Is that a reasonable statement? If the NAV takes another tumble, I'm basically forcing myself to sell low before the tax deadline, in order to avoid the 6% excess contribution penalty, which just adds insult to injury in that case, right?

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