Roth Risk-Takers Rebuked by Regulators | AccountingWEB

Roth Risk-Takers Rebuked by Regulators

Remember the confusion when the Roth IRA first surfaced? Loopholes (aka - laws written in a hurry that don't account for all contingencies) appeared to provide taxpayers with the opportunity to convert funds from a traditional IRA to a Roth IRA, pay the associated income tax, then withdraw funds immediately from the Roth IRA with no penalty, even though the rules for a qualified withdrawal of funds from the Roth IRA had not been met.

No one really expected that little glitch in the law to last, and temporary regulations that came out soon after the law was enacted did a fairly good job of patching most of the loopholes associated with the Roth IRA.

But just to make sure he understood exactly what was right and wrong, taxpayer Douglas Kitt took the matter to court (Kitt v. United States), claiming that the penalty provision of the law was not in place at the time he made his withdrawal of funds from the IRA and that assessing the penalty retroactively violates the Due Process or Just Compensation Clauses of the Fifth Amendment.

The U.S. Federal Court of Claims has just handed down its official opinion. The Court concluded that Congress never intended the law surrounding the Roth IRA to allow for non-qualified withdrawals from the account to be accomplished without penalty. Because Congress did not write this penalty clause into the law was not sufficient grounds to assume the clause was not intended to be there. The penalty stands, as corrected, and can be applied retroactively to all untimely withdrawals of funds from Roth IRA accounts.

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