Should Roth IRA $ be taxed twice?

yadax3November 9, 2005

Hi everybody,

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!

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A basic principle of taxation in the USA is every dollar is taxed once and only once. (Qualifying Roth IRA withdrawals can be an exception.)

Your contributions to the Roth IRA should not be taxed again by the IRS because you already paid taxes on those contributions when you put them into the Roth IRA. The earnings on the Roth IRA may or may not be taxable depending on your circumstances. For example, how old are you, how long were the funds in the IRA, were there any circumstances that existed in your life that would qualify you for an exception to the 10% penalty for early withdrawal?

Page 58 of the pub linked to below should help you answer your questions.

In my 12 years of preparing taxes, one of my favorite things to do is prove the IRS wrong when they assess additional taxes.

Good luck.

Here is a link that might be useful: IRS Pub 590

    Bookmark   November 11, 2005 at 7:25AM
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Thanks, this really help a lot!

    Bookmark   November 11, 2005 at 10:19AM
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