A client has about 100k in a ROTH. First deposits were made over 5 years ago. We can research and get the exact basis and dates of each deposit.
Client wants to withdraw 5k.
I understand that deposits come out first. How does the broker dealer code this as a non-taxable distribution on a 1099?
Will client need to provide documentation that this is original deposit monies?
Thanks in advance.
A Roth is qualified once the taxpayer reaches 59.5 AND 5 years has passed since the first Roth contribution. At that point all distributions are tax free. This particular client has met the 5 year requirement, but may not yet be 59.5 and if not all distributions are treated as non qualified distributions. So if client has made at least 5,000 in regular contributions, a distribution of 5,000 will be non taxable but still needs to be reported on Form 8606.
again, I want to be clear. Thanks for your time. Client is 35. We can document his deposits, some of which are over 5 years ago. He can withdraw his deposits with no tax or penalty. Just needs to be reported on 8606. I’m glad that there are experts on this site that can help. Thanks in advance.
If he has made regular Roth contributions of at least 5,000, his distribution will incur no tax or penalty. However, if the “deposits” were conversion contributions, there could be a 10% penalty. All regular contributions come out first before any conversions, then conversion come out starting with the oldest conversion. If there were no conversions here, the situation is very simple, no tax or penalty. Otherwise, would need more detail.
Permalink Submitted by Alan - IRA critic on Thu, 2017-12-07 00:38
Unless the custodian knows for sure that the Roth is qualified, the distribution will be coded J for early distribution or T if client is over 59.5. With the J or T code the taxable amount in Box 2a will be blank and it is up to the client to determine how to complete Form 8606. Client will have to know the remaining basis in regular contributions and conversions if the distribution is more than the regular contribution basis. In short proper reporting of the distribution on Form 8606 is dependent on the client keeping accurate records. The custodian has no way of knowing the taxable amount or what may have transpired in other Roth accounts the client may own. The IRS very rarely asks for documentation to support the Form 8606 entries.
Permalink Submitted by Geoffrey Kasher on Thu, 2017-12-07 01:34
I’m not sure what the term “Qualified” refers to in your answer