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  4. EWP From A Roth IRA CD NOT on 1099-INT. Why?

EWP From A Roth IRA CD NOT on 1099-INT. Why?

racecar
  |     |   616 posts since 2014

When one incurs an early withdrawal penalty for closing a CD early, that penalty is always listed in a box on the yearly 1099-INT, and is usually tax deductible.

But, what if the CD you closed early (and got hit with the bank's EWP) was a ROTH IRA CD? Is there any reason that shouldn't also appear on the 1099-INT?

At the same credit union I had both:

(1) A Small non-IRA CD

(2) A Large ROTH IRA CD

The credit union has a 180-day EWP for closing a 5yr CD early (whether it's a normal CD or an IRA CD).

When I closed both CDs early, I paid the Credit Union's EWP on both CDs (an amount equivalent of 180 days of dividends) -- but only the "normal" CD's EWP appeared on their 1099-INT that just came. The almost-$600, 180-day EWP I paid the credit union to close my ROTH IRA CD early was NOT included on their 1099-INT.

Before I call the credit union, can someone tell me if the ROTH IRA CD EWP should have been included in that box as well? Or no, because it was IRA funds?

This is NOT the IRS' "EWP" I'm talking about (for taking an early distribution before age 59.5), but the standard EWP assessed by the BANK/CU when you end any CD early with them (in this case, a 180-day EWP).

The receipt I got from the CU when closing the Roth CD early says "Unreportable Withdrawal" on it because instead of it being a distribution to me (which they'd have to report to the IRS), I had them directly transfer the Roth funds to another CU. But the same receipt also shows "Certificate Penalty: $XXX.XX" (almost $600).

How can I get tax-deductible credit for that $600 I paid the credit union for breaking my Roth CD with them early? (Or am I not supposed to if it's IRA money?) If it's not included on the CU's 1099-INT, which they file with the IRS, it'll cause a red flag with the IRS if I try to claim it.

I couldn't find an answer via Google because google keeps thinking the question is about the IRS' "EWP" NOT the Bank-assessed EWP.

Is there any reason only the non-IRA CD EWP showed up?

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Answers
ocsteve
  |     |   96 posts since 2010
In my experience, early withdrawals with penalties from ALL IRA account types (Traditional, Rollover and ROTH) are NOT tax-deductible. The reason are that the funds are maintained tax exempt while held and you cannot have a possible double deduction, like when you make a traditional IRA contribution and then are assessed an early withdrawal penalty. Same for Rollover IRAs. The ROTH IRAs were tax exempt always, so no tax deduction for early withdrawal penalties.

Hope this helps you understand. You can also refer to the IRS instructions for the early withdrawal penalty deduction line on your Form 1040.
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CuriousDave
  |     |   233 posts since 2018
A penalty for early withdrawal is in reality a reduction of CD income. We cannot claim a tax deduction for a reduction of non-taxed income as that would amount to double dipping. For the same reason, if we wish to argue that the penalty is an expense, Section 265 of the Internal Revenue Code disallows the deduction of costs associated with tax exempt income.
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w00d00w
  |     |   360 posts since 2012
FWIW, here's a reply from a "Tax Expert" at Turbotax to a similar question:

Yes, you can deduct the early withdrawal penalty - but only for a taxable CD. When you enter the interest income on Form 1099-INT, check the box beside 'My form has info in more than one box 1'. Then enter the penalty in box 2. That will reduce your adjusted gross income by the penalty amount.
For a CD that is held within an IRA, there is no taxable event and nothing to deduct.

https://ttlc.intuit.com/community/retirement/discussion/can-early-withdrawal-penalty-on-cd-be-deduct...
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CuriousDave
  |     |   233 posts since 2018
A penalty for early withdrawal of CD funds inside a traditional IRA account will reduce the balance of the account that will eventually have to be withdrawn by, and taxed to, the owner during lifetime and/or by the owner’s beneficiary/beneficiaries upon death. So, in effect, there is an indirect tax “deduction” for the EWP.
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racecar
  |     |   616 posts since 2014
Wow, if that's the case then one has to be way more careful where one puts their IRA money than non-IRA money, for if one wants to break an IRA CD early for any reason, they have to take the bank's penalty fully, without even being able to write it off; that money's completely gone. (at least with a taxable CD, while the money is still "gone" you get part of it back when you can use it to offset taxes on other income).

In my case, I was moving it from 3% to a 5% with 4 more years left, so it was still worth it -- but not by as much, now that I can't write off that $600 loss.

Seems a bit unfair, as a bank's own penalty doesn't really have anything to do with whether the funds are taxed or not. If one can write off the $600 bank penalty (which has nothing to do with the IRS) on a non-IRA CD (even if that much in interest hasn't even been earned yet), why not for a Roth CD? I guess it's a moot point if it's not allowed, but I don't see why it shouldn't be the same.
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choice1
  |     |   370 posts since 2023
And, is that EWP from the Roth a proper distribution by IRS timeframe/rules…we know what EWP, if there is one,  from an IRA CD is…a distribution!
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Zemo999
  |     |   103 posts since 2017
The basic answer, which is that the fund withdrawn on a Roth IRA Cd are not taxable, and thus not a reportable event to the IRS, is correct I believe.
I would add this: You are clearly upset that precious Roth funds have been diminished by the EWP, and are gone for good - no way to make that up except to contribute more funds, unless you're still working. It's an excellent example, though, of why the length EWP is so important particularly for irreplaceable Roth or SEP IRA CDs - I often will take a somewhat lesser interest rate as a trade-off for a mild EWP for retirement account CDs. Over the past year or so, I've researched it, and banks like Prime Alliance Bank has (or at least had) up to 24 mo. CDs with a 90 day EWP, IIRC - outstanding! And I think United States Senate FCU has (or had) 120 days EWP for a 2 year, and 180 EWP for a 3 year CD. That's way below what the 'average' EWP for that term usually comes to at most institutions I've researched.
I figure that Roth or SEP IRA funds are the last ones I'd want to use, given their irreplaceable nature, and the compounding and/or tax-free benefits they offer. If I *did* have to cash one in early, I figure that, for instance, if the EWP is 90 days, well, I've lost 90 days of interest, but I really didn't lose any principal (assuming you've past the 90 day mark since opening the account, or it's stated that such a penalty will not dig in to principal.) If you do have to break a retirement CD early, clearly the 'pain' inflicted will be less impactful if one does their homework on what the EWP term for that product is.
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racecar
  |     |   616 posts since 2014
Well the Roth CD had a 6-month (180 day) EWP and I closed it after about a year, so I didn't lose any principal, just half the interest it had made since it had been opened. It still was worth it to take the hit and move it to 5% for the remaining 4 years instead of being stuck at 3% for 4 more years... but especially with Roth funds, it still seems arbitrary to allow writing-off a bank penalty for normal funds, but bar the write off of that same penalty if it's with Roth funds. I wasn't cashing anything out for myself, I was just changing which bank held those funds.
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