Should Roth IRA $ be taxed twice?
Several years ago my husband changed jobs and the new company he joined hadn't set up their 401K plan yet, so we rolled the 401K balance from his former employer into a traditional IRA. We also opened and deposited money into a Roth IRA. Then, in 2003 after his new company had established their own 401K and much of the money he'd rolled into the IRA had evaporated, he closed the IRA and rolled the balance into the 401K. At the same time, we withdrew what was left in the Roth IRA because we were steadily losing money, couldn't roll it into the 401K, and didn't want to continue our relationship with the broker.
When I filed our 2003 taxes, I apparently didn't document the IRA rollover or withdrawal correctly and as a result, I recently received a letter from the IRS showing a large balance owed. In response, I provided the IRA with evidence of the rollover along with a check for a 10% penalty plus interest on the Roth IRA withdrawal amount. I've now received another letter demanding additional $$$ because the IRS recalculated our 2003 income to include the Roth IRA withdrawal amount. Is this correct? I mean, the money we deposited in the Roth IRA had already been taxed. How can they tax me twice on the same income?
Your prompt advice would be very much appreciated. Thanks!