Early Withdrawal

Archive for June, 2007

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Question: Help Needed with IRA Early Withdrawal & Contribution Limit!?

I have a Roth IRA with Fidelity & a Traditional IRA with Sharebuilder. The Sharebuilder account was opened in 06. I would like to close my Traditional IRA for many reasons and I’m trying to figure out how much of the withdrawal from the Traditional IRA will face the 10% penalty and how much I can still contribute to the Roth IRA for 07.

Answer: If you close out your traditional IRA, you will owe income tax and a 10% penalty on:

1. The 900 contributed in 2006
2. All earnings from the account.

You can withdraw your 2007 contribution and you will not owe income tax on it.

A better way to proceed would be to convert the entire account to a Roth IRA.

If you convert to a Roth IRA, you pay income tax only on the 2006 contribution and the earnings from the 2006 contribution. There will be no penalty. And since you have not taken a tax deduction for the 2007 contribution, there will be no taxes due on either the 2007 contribution or the earnings from the 2007 contribution.

Assuming you are eligible for the maximum $4,000 contribution, you can contribute an additional $400 to your Roth. The 2007 Fidelity Roth IRA contribution of $2,500 and the converted amount of $1,100 are considered part of your maximum contribution for 2007, but the 2006 contributions and all earnings are not part of the 2007 contribution.

The above assumes that your Sharebuilder account has not decreased in value. If your account has decreased in value, the contributions are considered to be converted first, with 2006 before 2007. In this case, you have less tax owed than if the account had earnings.

Investment Finance Tips : IRA Retirement Penalties