My understanding of IRA is that withdrawing up to amount contributed does not incur tax penalty. So I can basically withdraw any amount of taxed income I contribute. It just seems like too good to be true. Like are there any downsides to using IRA to invest personal income?

For example, what happens if I buy 10k in stock with personal income, and the stock goes down 5k, and I withdraw 10K. Will the extra 5K I withdraw be taxed or not?

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    The premise of your question is slightly incorrect. What you describe about withdrawing pre-retirement up to your contribution applies only to a ROTH IRA. Not a regular IRA.
    – JohnFx
    Sep 4 '21 at 16:26
  • Ok, I read you can technically do it, but requires a special form, 8606.
    – the_prole
    Sep 4 '21 at 18:24
  • What you have read is false. regardless of whether you use Form 8606 or not. If the IRA contains both pre-tax as well as post-tax money, then withdrawals are always prorated between the pre-tax amount (includes pre-tax contributions, all earnings/growth in the IRA, including earnings/growth of the post-tax contributions) and the post-tax amount contributed). Also keep in mind that in the eyes of the IRS, you have only one (Traditional) IRA regardless of how many different custodians it is invested with, and so you can't play games such as this IRA account has only post-tax money on it. Sep 4 '21 at 18:47
  • Any withdrawals are prorated between taxed non taxed, and earnings. But you still need to submit the 8606 form. Thanks.
    – the_prole
    Sep 4 '21 at 19:07
  • No, the pretax portion is all pretax contributions plus all earnings and growth of the pretax as well as the post-tax contributions. The post-tax portion is _just the post-tax contributions; the earnings and growth of the post-tax contributions are included in the pretax portion; you haven't paid tax on that as yet. Its only in a Roth IRA that all contributions are post-tax and earnings are tax-free when withdrawn in timely fashion. Sep 4 '21 at 22:15

For example, what happens if I buy 10k in stock with personal income, and the stock goes down 5k, and I withdraw 10K. Will the extra 5K I withdraw be taxed or not?

You can't withdraw money you don't have, if the value your 10k investment is cut in half the most you could withdraw is 5k.

In a Roth IRA you contribute post-tax dollars and can therefore withdraw your contributions before retirement with no tax burden and no penalty, unlike a 401k or traditional IRA where withdrawing early could result in a penalty on top of the taxes owed from taking the withdrawal.

IRA's are tax-advantaged and should be prioritized, most people prioritize maximizing annual IRA contributions 2nd only to getting their full employer match on 401k (if applicable).

The main downside of an IRA is the low annual contribution limit which makes it impractical to use as your sole instrument for retirement saving/investing.

  • This. The max contribution is 6k to any and all of your IRAs. I read you can technically take out post tax contributions to traditional IRA tax free, but are required to fill out some form, basically a record keeping burden. No so with ROTH.
    – the_prole
    Sep 4 '21 at 4:01
  • What I mean with regard to math that did not add up, is if you withdraw your contribution, but the value of the account is down, like do you just withdraw from post tax money? Like say I have 10k of pre tax, then I make 10k post tax contribution, then account value falls to 15k, then I withdraw 10k, is the entire 10k not taxed? I guess it's just a theoretical question.
    – the_prole
    Sep 4 '21 at 4:09
  • Ah, I see what you're asking there, yes, you have to file Form 8606 when you make non-deductible (post-tax) contributions to a traditional IRA so that you aren't taxed on the withdrawals. I don't know offhand if you had made 50% pre-tax and 50% post-tax contributions and then had your investments lose 50% of the account value if you could just say it was the pre-tax side that was lost, but I think as long as you withdrew less than the total post-tax contributions then nobody would question it.
    – Hart CO
    Sep 4 '21 at 5:24
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    @the_prole HartCO's comment re withdrawing money from only the post-tax part is wrong. All money coming out of an IRA that contains pre-tax as well as post-tax money is deemed by the IRS to be prorated between the pre-tax portion and the post-tax portion of the money. The IRA owner may claim that only the post-tax money had been withdrawn but the IRS will disallow it and send the IRA owner a bill for the tax due. Sep 4 '21 at 18:36
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    IRS Pub 590b has worksheets and sample 8606 forms illustrating how it all works out, and it depends on the IRA balance at the end of the previous year and the end of the year of withdrawal.Bur the net result is that the post-tax amount does not get withdrawn till the very last IRA account is finally closed. And those doing a backdoor Roth better do just one a year. Sep 4 '21 at 22:24

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