An Accidental IRA

[LondonCalling]

About 18 months ago I started saving for a down payment towards a house. I started putting some money into a savings account, and I also decided to open a scotttrade account so I could dabble a little with some stocks. The intention was to keep this money in the trading account for a year or two and then withdraw it into the savings account when my wife and I were ready to look for a place.

Now that I've got to this stage, I find that what I've actually been doing is contributing towards an IRA (I actually realized this when filing 2012 returns but only now am I understanding the consequences). My 2012 contributions were $1,000 and so far my 2013 contributions are $5,400. I now know that I might be penalized if I attempt to withdraw from this account.

My $6,400 deposits have grown to around $8,300, in case the growth is relevant.

Ideally, I would like to remove all of the money in this account and place it into savings. I have no interest in having an IRA at this time.

Here are my questions:

- First, for 2013, since the tax year is not over yet is it possible to reverse my contributions for the year and pretend like it never happened?
- If I withdraw the money now and place it in savings, what penalties/taxes will I face?
- If I withdraw when we are ready to buy, and use the money towards a house, what penalties/taxes will I face?

This is all a little embarrassing - thanks for any advice.

[disneysteve]

Is it a traditional IRA or a ROTH?

[LondonCalling]

It is a traditional IRA.

[disneysteve]

There is a 10% early withdrawal penalty.

HOWEVER, I believe there is an exemption to that penalty if the money is being used to purchase a house. There are some rules that apply (you have to not have owned a home in the previous two years, etc.) but it sounds like you might qualify. I would consult your tax professional. If you don't have one, it may be worth spending a little money to meet with a CPA to make sure this all gets done properly.

[Petunia 100]

You need to notify your custodian immediately. If you withdraw your 2013 contributions this year, there is no penaly. All of your gains this year will be taxable.

Withdrawing 2012's contributions and gains will result in a penalty, unless an exception applies. First time home buyer is one, check the rules to be certain you qualify. You will owe tax on last year's contribution and any gains.

http://www.irs.gov/pub/irs-pdf/p590.pdf

ETA: Your state may or may not comply with the federal rules.

[LondonCalling]

Thanks. Indeed, from the document you reference:

You generally can make a tax-free withdrawal of contri- butions if you do it before the due date for filing your tax return for the year in which you made them. This means that, even if you are under age 591 2, the 10% additional tax may not apply...

So it seems I will likely be able to withdraw the bulk of the balance since it was deposited in 2013. I will be doing this as soon as possible.

The remaining $1,000 2012 contribution will be a little trickier - it actually lost a little money in 2012, so there will be no taxable gains. only taxable income I guess. But my plan for this balance is to let it sit there until we are ready to buy, and then use the exception.

Do you know if the exception also covers tax on the gains? If so, would it be wiser to keep the 2013 contributions in place and withdraw the entire balance using the exception?

Thanks for the advice.

[LondonCalling]

I also found the following which might apply for 2012?

If you timely filed your 2012 tax return without withdrawing a contribution that you made in 2012, you can still have the contribution returned to you within 6 months of the due date of your 2012 tax return, excluding exten- sions. If you do, file an amended return with “Filed pur- suant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you re- ported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).

I wonder if this would be more or less hassle/profitable than using the exception for that last $1,000.

[Petunia 100]

I also found the following which might apply for 2012?

I wonder if this would be more or less hassle/profitable than using the exception for that last $1,000.

It will depend. Are both years in the same tax bracket?

[LondonCalling]

Yep, no change in income at all.

[Petunia 100]

Then I see a slight advantage to leaving it alone until you actually buy a house and qualify for an exception. If you amend your 2012 return and owe tax, you will also owe interest from 4/15/13 to the date you pay the tax.

Alternatively, you could just leave the 1k in the IRA, and save an additional 1k for your house down payment.

[disneysteve]

I have no interest in having an IRA at this time.

What are you doing in the way of retirement savings at this point? It is worth deciding if cashing out your IRA is really the best option if this is your only retirement account.

[LondonCalling]

Thanks again for the advice.

Regarding retirement planning - I am only contributing into a 401k at the moment. The past year or so I have been putting matching amounts into my 401k and my house deposit accounts (including the IRA).

I would certainly like to save more into an IRA for retirement but recently, once all debts were paid off and the 401k was getting a reasonable monthly chunk, the goal has been home ownership. Keeping the IRA and starting over with the down payment savings would be a bit of a set back (we were just about ready to start looking for a place).