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I have a question on how the IRS would calculate earnings on an early Roth IRA withdrawal.

Assume Taxpayer is under 59 and doesn't meet any specific exceptions to cash out early.

  • Taxpayer contributed $45k historically to Roth.
  • Roth is presently worth $60k.
  • Taxpayer withdraws $40k.

This seems sort of like an inventory LIFO/FICO question. I did some searches but couldn't find a distinct rule on how this would be viewed.

I think it could be one of three options:

  • No Earnings (i.e. FIFO "First in first out")
  • $15k earnings (i.e. sort of like LIFO "last in first out")
  • $10k earnings (i.e. split based on total earnings over cost).

I'll uptick any helpful answers and accept a conclusive one with a source.

1 Answer 1

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What occurs inside the account is mutually exclusive from contributions and distributions from the account.

You contributed $45,000, you want to take $40,000 back out, that's all that matters. Since this is a roth the contributions were taxed making the distribution tax and penalty free.

Now with citation! Regular contributions then rollover contributions then gains.

Page 31 in IRS Pub 590-B Distributions from Individual Retirement Arrangements (IRAs)

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that isn't a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. Order the distributions as follows.

  1. Regular contributions.

  2. Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:

    a. Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the

    b. Nontaxable portion.

  3. Earnings on contributions.

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    A basic understanding of the rules and your cited article: If you take an early withdrawal from a Roth IRA, contributions come out first,
    – quid
    Commented May 15, 2019 at 20:15
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    @PGCodeRider An IRS attorney or an attorney specializing in tax matters? Any lawyer can claim to be a tax attorney without knowing the difference between you-know-what and shinola because there is no special exam that the lawyer has to pass or any Board or court that will review the credentials to heck whether the lawyer has any expertise whatsoever in tax matters. Commented May 15, 2019 at 21:09
  • @quid thanks for adding a citation. Answer accepted. Thank You! Commented May 15, 2019 at 22:19

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