Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

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Topic Author
LambertStrether
Posts: 64
Joined: Fri Jun 02, 2023 5:25 am

Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by LambertStrether »

My spouse and I work abroad and get the Foreign Earned Income Exclusion and the Foreign Housing Exclusion; I earn considerably more. Last year, when we filed taxes separately, I had enough AGI to cover my Roth IRA contributions, but he did not, and had to withdraw his contributions. (His tax preparer explained that since he had no taxable income, he could not make already taxed Roth IRA contributions.)

For 2023, we'll be filing jointly, and it looks very likely that our combined incomes will be totally excluded, leaving us with no taxable income for the year. However, I've already made some Roth IRA contributions and Roth 403b contributions (US-based higher education employer). I expect that I shall have to withdraw all of those.

My understanding is that Roth contributions can be withdrawn at any time without penalty, but earnings are penalized. My Roth IRA is at Vanguard, and my Roth 403b at Fidelity. Any advice on how to make these withdrawals to avoid penalties? Is there part of this that I'm missing?
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by 123 »

The IRS imposes an annual penalty of 6% on excessive contributions to an IRA that remain in the IRA (any amount that exceeds the amount the taxpayer was eligible to contribute).

Vanguard has instructions on how to remove excess contributions https://investor.vanguard.com/investor- ... ntribution

Fidelity has guidance on 403b contributions and seems to suggest contacting the plan administrator if there are excess contributions involved https://www.fidelity.com/learning-cente ... ion-limits
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celia
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Re: Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by celia »

You need to have the custodian do the withdrawal so that the year-end tax form is coded properly (“Removal of Excess Contribution”). The custodian will also calculate the gain or loss since the contribution was made. You will specify the contribution amount but the amount withdrawn will be different because of the gain or loss.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
LambertStrether
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Joined: Fri Jun 02, 2023 5:25 am

Re: Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by LambertStrether »

Thank you both! :)
little_star
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Joined: Tue Jun 16, 2020 5:08 pm

Re: Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by little_star »

As noted above, you will need to request "removal of excess contributions" from the custodian to do this correctly.

A separate question: is it possible that you exceeded the income limits for direct Roth IRA contributions last year? The maximum income for a direct Roth contribution is only $10k for MFS (married filed separately). This very low MAGI limit catches some people off guard if they are used to the MAGI limits for MFJ or single.
RussianInNYC
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Joined: Sat Oct 20, 2018 11:08 pm

Re: Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by RussianInNYC »

Exclusion of the foreign income is an option- not a requirement.
Do not exclude all of it - most likely tax on non-excluded would be low and you can contribute
Topic Author
LambertStrether
Posts: 64
Joined: Fri Jun 02, 2023 5:25 am

Re: Withdrawing Roth 403b and Roth IRA contributions because of foreign income exclusion

Post by LambertStrether »

LambertStrether wrote: Sun Jun 04, 2023 1:10 am My understanding is that Roth contributions can be withdrawn at any time without penalty, but earnings are penalized. My Roth IRA is at Vanguard, and my Roth 403b at Fidelity. Any advice on how to make these withdrawals to avoid penalties? Is there part of this that I'm missing?
I am pleased to find that I was absolutely wrong about the Roth 403b part of this, on both ends.

No income rules for contributions, as with Roth IRAs:
Do the same income restrictions that apply to Roth IRAs apply to designated Roth contributions?

No, there are no limits on your income in determining if you can make designated Roth contributions. Of course, you have to have salary from which to make any 401(k), 403(b) or governmental 457(b) deferrals.
No easy withdrawal of contributions, as with Roth IRAs:
Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?

No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½.
SOURCE: IRS, Retirement Plans FAQs on Designated Roth Accounts: https://www.irs.gov/retirement-plans/re ... h-accounts
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