I have a $6000 capital loss for this year via a regular stock investment. I was thinking of cashing out my Roth IRA because someone promised I could double my money with FOREX in 20 minutes (no, not really). The Roth (more than 5 years old) has earned $3500 in interest. If I cash out my Roth, does it combine with the capital loss so that as far as the IRS is concerned I have $2500 in losses for Tax Year 2024? Also, is the 10% penalty on the Roth withdrawal (I’m not 59 1/2 yet) on the interest or the whole withdrawal amount?
According to NerdWallet:
Roth IRA contributions (meaning the money you put into the account) can be withdrawn at any time, for any reason, with no taxes or withdrawal penalties.
Thus, the 10% penalty is only on earnings on your Roth contributions.
But since you’re withdrawing before age 59 1/2, the earnings that you withdraw will be subject to both penalty and income tax. AIUI, the earnings will be treated as ordinary income, not capital gains. So, again AIUI, the $6000 capital loss will not be offset by the Roth earnings.
Can anybody verify (or disprove) my supposition about taxes on early withdrawal Roth earnings?
10% penalty on the interest, no penalty on the principal. Some states may assess their own, California adds 2.5% for a whopping 12.5% total. Your broker should have some info about the principal (basis) and by most accounting practices it would be considered FIFO so if you take an amount up to the principal it won’t be counted as a penalty.
Your stock losses are irrelevant as far as the Roth withdrawal is concerned. If it was 100% interest withdrawal, you’d pay a penalty of $350 not $0.
Now getting out of FQ territory into IMHO, would it be advisable to take, let’s say, $1000 of the disbursement and make an estimated tax payment to lessen the sticker shock in April?
Why would do need to cash out your Roth? You joked about FOREX, but assuming there’s some truth there, just open a Roth that can trade on Forex.
Feelin’ good about #13 on the roulette wheel.
What is your safe harbor status?
It would be advisable to take an appropriate amount (a calculated amount of the tax and penalty) and set it aside to pay the tax in April.
If needed, you could make the estimated tax payment but it would be easier to have the IRA custodian make that tax payment for you.
What is that?
Schwab and I was going to look at that as a option.
Usually, estimated taxes are paid in order to avoid tax underpayment penalties. However, underpayment penalties can be avoided if your total tax payments meet a certain threshold (safe harbor). If you meet the threshold, you won’t get hit with a penalty, but you will still be liable for the tax. That’s why I suggested to definitely put the money aside to pay the tax, but to consider if you needed to pay the estimated tax or not.
I took an Inherited IRA withdrawal this year, and even though I didn’t need to pay the tax right away due to the safe harbor rules, I did have the IRA custodian withhold the tax anyway.
https://www.hrblock.com/tax-center/irs/tax-responsibilities/avoiding-underpayment-tax-penalty/
My taxes are going to be weird this year. $6000 stock loss (which I believe I can only include $3000 this year), this Roth IRA issue that apparent doesn’t balance out with the capital loss and another $2500 in extra “business” income that won’t have taxes taken out. I’m willing to give the IRS a $1200 interest-free loan to avoid “oh shit, I’m miscalculated” somewhere in all of this although I usually get about $2000 back as a refund.