Roth IRA & EdIRA distribution – Tax filing
I took a non-qualified Roth IRA distribution from my own account 2009 to pay for my son’s college tuition and received a 1099R from my brokerage. By the same token, I took a qualified EdIRA distribution from my son’s account and he received a 1099R as well.
Do I have to do anything on my own income tax return to reconcile this? My son earned less than 1,000.00 in 2009 and I did not file an income tax return for him. Do I have to file anything to reconcile this?
Thanks….
Permalink Submitted by Alan Spross on Thu, 2010-08-12 22:54
For your own Roth IRA distribution, you will need to file Form 8606, and the ordering rules will apply for NQ distributions. You will have to know the balance in all your Roths of regular and conversion contributions. Anything over that total is earnings. The ordering rules require that you first must distribute your balance of regular contributions which are tax and penalty free. Then conversions which are tax free, but carry a penalty if not held 5 years. Last is earnings. Your payment of qualified higher education costs for your son will waive any penalty, whether your distribution comes out of conversions held under 5 years or from earnings. You would report the penalty exception on Form 5329 if necessary. You would still pay ordinary tax on any earnings distributed, but no penalty. If you did not file for an extension, you need to amend your 2009 return on a 1040X with the 8606 and 5329 to claim the exception if you tapped funds subject to penalty. This is one of those cases where you need to have kept a tally sheet to record your prior Roth activity so you can properly report non qualified distributions.
For your son’s ESA distribution, even though he is under the normal income filing requirement, he needs to file a return to show that his distribution was tax free and that a penalty should not apply. Complete the worksheet on p 65 of Pub 970 and it will generate the taxable amount. Earnings come out pro rate with contributions, so there might be a small taxable amount. If so, report it on line 21 of Form 1040, or indicate no taxable amount on the same line. He will then need a 5329, Part II to show that there is no penalty on the taxable amount. If you do not file, chances are you will never hear from the IRS based on the type of account and small distribution. However, if you do not want to wait for a possible inquiry a couple years from now, file the 2009 return for him and it will be the end of it. Like your own Roth, you need to know your total contributions to the ESA in order to know if there were any earnings in the account at the time of distribution when your do the worksheet on p 65.
Permalink Submitted by Thang Ho on Tue, 2010-08-17 17:29
Hi Alan-Oniras,
My computer was consumed by viruses, and was able to rebuild and re-install finally – after 1 week out of action. I downloaded the forms you suggested. Thank you for an informative and detailed response.
rlthang_2000
Permalink Submitted by Thang Ho on Sun, 2010-10-03 00:35
Hi Alan,
The earning from his EdIRA is considerable. Is this taxable if used for qualified educational expenses? His EdIRA account has been expended.
My son is over 18 and I lost his child tax credit, but I am still claiming him as a dependent. I am funding his education with his EdIRA and also my RothIRA. As my dependent and so far having not made more than 1,000.00 / year, he haven’t filed his own income tax return.
Would it be advantageous to drop him as dependent and have him file separately?
Thanks again.
Tom…
Permalink Submitted by Alan Spross on Sun, 2010-10-03 03:01
You actually do not have the option to allow him to take his own exemption if you are entitled to take his dependency exemption. You can opt NOT to take the exemption, but that does not allow him to take it. Since his ESA distribution will be tax free including the earnings because they were applied to qualified expenses, he will not owe any tax. His standard deduction, although limited, should be enough to cover any tax liability if his income is not over 1,000.
Higher education tax credits are very complex and outside the scope of this forum. But you should look into these credits since they often can be used to reduce YOUR tax bill unless your income is too high.