Withdrawing from Roth IRA Early After Contribution

By | November 11, 2013

What will happen if you withdraw money from a Roth IRA shortly after you contribute to it? For example, if you contributed $1500 to Roth IRA, withdrew $1495 a month later.


Will someone get hit with a fee for early withdrawal?

The IRS is really the best source on this. This is the page that covers IRA’s. The penalty (and tax) free nature of withdrawals is found by combining the following text and  intrepreting it:

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

OK, so we know your contributions are not “qualified”. From there:

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs….

Other early distributions.
Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

OK, so now we know that you must also pay a 10% additional tax on the taxable part of your distribution (withdrawal). So now we just have to figure out what’s taxable.

How Do You Figure the Taxable Part?

To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III.


Form 8606

Ok, that kind of sucks – they used to have that on there IIRC. It had to do with ordering (explained on that page) and in the example it shows that contributions, ordered first and already taxed, are not taxed when withdrawn. We can actually see on the instructions for 8606 the IRS now just lets you ignore it (sort of… should still be listed on the 1040):

If, in 2013 or 2014, you made traditional IRA contributions or Roth IRA contributions for 2013 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2013 tax return, the returned contributions are treated as if they were never contributed. Do not report the contribution or distribution on Form 8606 or take a deduction for the contribution