Roth IRA Withdrawl Question
- Thread starter throwittoblythe
- Start date
If you also have a 401K, another option is to borrow from that to be paid back over a chosen set of time. You won’t earn money from the investment lost while in repayment, but any interest on the loan you’d have to pay would be to yourself rather than a bank.
Others have said it, but stated a different way, it's only true in the sense that contributions to a Roth have an annual cap.
If you are already socking away the annual maximum, any cash you pull out can never technically get put back, because it's considered a new contribution and subject to the annual contribution cap. You can't go over the cap to put back money you have taken out.
But we also don’t know his full situation, so it’s hard to say “do this” with a high degree of confidence.
You received restricted shares in exchange for a loan, correct? So how much are the shares above the value of the loan? If you sold the shares, will you have capital gains to pay on them? If the margin isn't great, can you just walk away from the shares and cancel the loan? With the restrictions, do you really own anything other than a promissory note? This would make a great Dave Ramsay phone call
Agreed. My original draft was just to confirm the Roth withdrawl of contributions is ok. I expanded it to see if I was not seeing the whole picture.
I totally understand there are massive qualifiers on the advice given that I'm not sharing the entire picture here.
Thanks for stating it this way. It was helpful to see this in writing. I knew by pulling out Roth I'm sacrificing future gains, but it hits harder when you see that big number in writing.
Exactly right. Share value is 4-5x the balance on the loan. I've owned the shares for just shy of 2 years, so shouldn't be an short-term capital gains, as I understand it.
Very nice margin indeed
Your worst option is pulling from the Roth. You are giving up 100% tax free gains AND potential annual average growth of 9-11%
I think the best option is when exiting the company, get a HELOC to pay off their loan. Then, sell the needed shares to payoff the HELOC. Also, consider converting the rest into mutual funds instead of single shares.
If I am mistaken and they somehow are able to continue to restrict your movement in those shares despite not employed and owing nothing on them, HELOC still feels like the best option.
Roth contributions can be withdrawn at any time without tax or penalty, but it's important that you've documented those contributions on previous tax returns. Some DIYers neglect to report Roth contributions, and since it doesn't affect their taxes in the given year, it can go unnoticed for a long time. If the IRS doesn't have a record of your contributions, but now they have a 1099 for a big withdrawal, you're going to have a big headache.
Interesting. I hadn’t thought of this angle.
Would my Roth account be enough to show documentation of contributions vs earnings?
Thanks for this. I always wondered why that line even existed in my taxes.
Good point and easy to overlook. If your Roth contributions go back far enough make sure you are documenting your annual contributions. I ran into a situation where my brokerage didn't have records from over 10 years ago of my Roth IRA contributions enabling me to easily differentiate contributions vs. gains when I made a withdrawal. Fortunately, I didn't have the monies transferred directly from my paycheck (2 employers ago) and I still do business with the same bank. So I could track contributions from that end.
Wow, good to know. I don’t know that I’ve been documenting Roth contributions in my tax documents, either. Sounds like I need to get into that practice.
I'm not sure about that. That'd be a good question for a CPA or certified tax preparer. It probably depends on how well it's documented by the custodian, but even with that, I think you'd probably need to file some amended returns.
I'm a Financial Advisor, so I help keep people on the right side of the law proactively, but I'm not an expert on dealing with the IRS to correct past mistakes. If you haven't documented Roth contributions in the past and decide to make a withdrawal for this situation, I would highly recommend engaging with a professional tax preparer to help you fix it.
It's not something I would encourage anyone to amend a return for, and if we're being honest it's also not something I'm sure the IRS even tracks. The IRS already gets that information via form 5498 filed by the custodian of the IRA which tells the IRS the amount contributed in the year and also what the value of the account was at the end of the year.
I've not encountered any issues with clients who hadn't previously reported roth contributions reporting tax free distributions on their return.
Whether you've kept track of the contributions or not, the key is to be able to support the tax free distribution with evidence that you in fact contributed the money.
Have you considered paying back the company in installments while you're still working for them? I mean, from what I understand, they won't accept the payments, but you could put them in an escrow account every month anyway. That way when/if you finally do leave the company, the pay down of the loan won't be nearly as burdensome.
Have you considered asking your company to amend the stock loan payments to fit your desired budget? If it is a no or low interest loan why hurry to pay it?
