LeoDLion

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Is the capital gain from a Roth account subject to the 5 year waiting period?

For example, if one is at least 591/2 years old and the Roth account has 50K, has been there more than 5 years, will any capital gain for this year be subject to fed tax if one decides to withdraw it? Lets say the cap gain is 20K and 60K is withdraw , do you pay fed tax on the 10K?
 

Terpskins99

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I'm not entirely following. How can you withdraw 60k from an account that has only 50k? Try re-wording your example.

If you have a Roth IRA account, are over 59 1/2 years and have had that account for over 5 years, yes you can withdraw any amount and any capital gain made from the eligible contribution is non-taxable.

Now if you made a contribution within 5 years, then it becomes a little more complicated. Since this subsequent contribution hasn't yet matured, it may be liable to a 10% early withdrawal penalty.
 
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LeoDLion

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I'm not entirely following. How can you withdraw 60k from an account that has only 50k? Try re-wording your example.
My example was you have 50K originally in the Roth, you are 59 1/2 and it's been there for at least 5 years. This year the account made 20K from capital gains making your total Roth worth 70K.

If you have a Roth IRA account, are over 59 1/2 years and have had that account for over 5 years, yes you can withdraw any amount and any capital gain made from the eligible contribution is non-taxable.
You are saying then that the entire 70K is not taxable.

Now if you made a contribution within 5 years, then it becomes a little more complicated. Since this subsequent contribution hasn't yet matured, it may be liable to a 10% early withdrawal penalty.
I am not asking this question but I believe yes its subject to tax.
 

Terpskins99

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My example was you have 50K originally in the Roth, you are 59 1/2 and it's been there for at least 5 years. This year the account made 20K from capital gains making your total Roth worth 70K.
Ok, you're saying YOU put in $50,000 into a roth IRA. Now you're planning to cash it out (and you're over 59 1/2... etc) after your roth IRA grew to $70,000. Your contribution: $50,000. The capital gain: $20,000.

You are saying then that the entire 70K is not taxable.
Correct. But let me explain, since I think you're a little confused. The $50,000 you initially put into the Roth IRA wouldn't have been taxed no matter what, because you already paid income tax on it when you started the IRA. You don't get taxed just for having money. You only get taxed for making money. Makes sense?

The only amount that you are liable for is the (+) $20,000 you gained. Now, because this specific investment is a Roth IRA, you are exempt from paying any capital gains tax as well.

I am not asking this question but I believe yes its subject to tax.
No, it is not. The purpose of using Traditional IRA/Roth IRA is that they are retirement funds that are tax deductible.

With a Traditional IRA, you choose to contribute to a growing fund now. Lets say you made $50,000 income in 2008 and that year you donate the max $5,000 to a traditional IRA. Well, for 2008 that $5,000 is tax deductible so you only have to pay Income tax as if you only made $45,000 that year (i.e. $50k - $5k). Then lets say 20 years later you turn 60 and want to cash out the Traditional IRA (and lets say the IRA has grown to $10,000). Now you pay tax for the full $10,000 ($5,000 as income tax that you deferred till now and (+) $5000 capital gains).

What is different with the Roth IRA is that you do NOT make the deduction to begin with and use money that you've already paid income tax with. So again, in 2008 you made $50,000 income. This time, in 2008 you pay the FULL income tax of $50,000. AFTER you've paid the income tax, you can use this money (example $5,000 post-tax) to contribute to the Roth IRA. 20 years later, the Roth IRA grows to $10,000. You cash it out. Now when you're 60 years old, you do NOT have to pay tax on either the initial $5,000 or the (+) $5,000 capital gain. The reason the government allows this is because in their eyes, you ALREADY paid the tax way back in 2008.

Make sense?
 
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LeoDLion

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...The only amount that you are liable for is the (+) $20,000 you gained. Now, because this specific investment is a Roth IRA, you are exempt from paying any capital gains tax as well.
...
I want to thank you for taking the time to answer my questions, I really appreciate it.
 

IceMan0824

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Is the capital gain from a Roth account subject to the 5 year waiting period?

For example, if one is at least 591/2 years old and the Roth account has 50K, has been there more than 5 years, will any capital gain for this year be subject to fed tax if one decides to withdraw it? Lets say the cap gain is 20K and 60K is withdraw , do you pay fed tax on the 10K?
I just wanted to add:

Your account has been opened for at least 5 years, so no withdrawals (including any gains) after the age of 59-1/2 will be taxed or penalized.


Here is a Link to Fool.com. I believe example #2 and #3 refers to your question. Although one talks about a conversion instead, what matter is the date that the Roth was started.
 

Stroganoff

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this thread is uber confusing. why would anyone advocate double taxation?

captain obvious says: capital gains tax is for taxable accounts...
 

IceMan0824

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this thread is uber confusing. why would anyone advocate double taxation?

captain obvious says: capital gains tax is for taxable accounts...
Captain gains tax is the wrong word here, since would be counted as an income tax instead. The tax will be on the gain on the principal in the Roth.
 

XoQo

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Captain gains tax is the wrong word here, since would be counted as an income tax instead. The tax will be on the gain on the principal in the Roth.
I believe you are incorrect. Your vision of the Roth IRA rules essentially destroys the benefit of a Roth IRA over a traditional IRA. The hallmark of the Roth is that your distributions are tax free if you take them out at retirement. The government (as i read the IRS rules below) would not assess a capital gains tax nor income tax on the value of the Roth IRA. The government is ok with it since the money you poured into the Roth has already been taxed as ordinary income (which you correctly pointed out) -- and because there are yearly contribution caps to the account and it is to be used for retirement.

There are exceptions however to this. Essentially the IRS defines only "qualified distributions" to be tax free from an IRA. Distributions are essentially payouts from the IRA that are either: principal (i.e. your contributions), conversion principal (say you rolled a traditional IRA into this Roth) or earnings on principal.

The rules that make a distribution tax free are as follows:

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and


2. The payment or distribution is:
1.Made on or after the date you reach age 59½,
2.Made because you are disabled,
3.Made to a beneficiary or to your estate after your death, or
4.One that meets the requirements listed under First home exception

Bottom line, if you stick to the conventional wisdom of not touching your Roth IRA (i.e. no withdrawals) until retirement or disablement -- withdrawals from the account ("distributions") would be deemed "qualified" and thus would be tax free.

My source is the IRS info here:

http://www.irs.gov/publications/p590/ch02.html#d0e10519


In answer to the OP's question -- any withdrawal from the Roth would be subject to the "qualified distributions" rules --- so if you withdraw the capital gains say two years after you start your Roth, it is by definition not a qualified distribution (violates 5 year rule) and you owe capital gains tax on it (it would not be federal tax since it is not earned income).


Totally open to discussion....i may have goofed and misread/misinterpreted the info at the URL....
 

IceMan0824

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I believe you are incorrect. Your vision of the Roth IRA rules essentially destroys the benefit of a Roth IRA over a traditional IRA. The hallmark of the Roth is that your distributions are tax free if you take them out at retirement. The government (as i read the IRS rules below) would not assess a capital gains tax nor income tax on the value of the Roth IRA. The government is ok with it since the money you poured into the Roth has already been taxed as ordinary income (which you correctly pointed out) -- and because there are yearly contribution caps to the account and it is to be used for retirement.

There are exceptions however to this. Essentially the IRS defines only "qualified distributions" to be tax free from an IRA. Distributions are essentially payouts from the IRA that are either: principal (i.e. your contributions), conversion principal (say you rolled a traditional IRA into this Roth) or earnings on principal.

The rules that make a distribution tax free are as follows:

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and


2. The payment or distribution is:
1.Made on or after the date you reach age 59½,
2.Made because you are disabled,
3.Made to a beneficiary or to your estate after your death, or
4.One that meets the requirements listed under First home exception

Bottom line, if you stick to the conventional wisdom of not touching your Roth IRA (i.e. no withdrawals) until retirement or disablement -- withdrawals from the account ("distributions") would be deemed "qualified" and thus would be tax free.

My source is the IRS info here:

http://www.irs.gov/publications/p590/ch02.html#d0e10519


In answer to the OP's question -- any withdrawal from the Roth would be subject to the "qualified distributions" rules --- so if you withdraw the capital gains say two years after you start your Roth, it is by definition not a qualified distribution (violates 5 year rule) and you owe capital gains tax on it (it would not be federal tax since it is not earned income).


Totally open to discussion....i may have goofed and misread/misinterpreted the info at the URL....
Re-read my post there big guy. We're saying essential the same things.

OP's account has been opened for at least 5 years and he is at least 59-1/2 so the withdrawal of his earning (even though he had earnings less than 5 years) would not be taxed.

My post that you quoted referred to Dal's question that you can't be assessed capital gains on a Roth. I clarified that you withdrawals from the gains not counted as a qualified withdrawal would be taxed at the then current marginal income tax rate.

And noone every brought up the subject of retirment. The OP was interested in withdrawing his money regardless of whether he retired or not.