Proof of 5 Year Holding Period Roth Contributions
Client age 65 opened a Roth IRA in 2019. In 2021 due to potential identity theft had custodian transfer the Roth into a new Roth account with a new account number.
Client looking to withdraw account in 2024.
The original 5 year holding period is met if using the original 2019 date. But the new Roth account shows an opening date of 2021 which is less than 5 years.
I know the 5 years should still start with the 2019 account but how does the IRS know that?
Is it the custodian’s job to report the distribution in 2024 as qualified or is the taxpayer responsible and if so what proof do they provide?
Thanks
Howard
Permalink Submitted by David Mertz on Fri, 2024-02-09 22:44
It’s not the custodian’s job to determine if the distribution is a qualified distribution, although many will do so with code Q on the Form 1099-R if the account from which the distribution is made has by itself met the 5-year qualification period. The IRS knows the year for which the client first made a Roth IRA contribution because the Roth IRA custodian reported to the IRA and to the client on Form 5498 the contributions made in 2019. For a distribution in 2024, the Roth IRA custodian will report the distribution with code T indicating that the client is over age 59½ and the client only needs to report the distribution on Form 1040 line 4a (and exclude it from line 4b). No Form 8606 Part III is needed because the distribution is a qualified distribution. If the client uses tax preparation software, upon entering the code-T 2024 Form 1099-R the software will ask if the client had a Roth IRA before 2020, the answer to which the software will use to determine that the distribution is a qualified distribution.
Permalink Submitted by Alan - IRA critic on Fri, 2024-02-09 23:43
Should the IRS ever ask (almost never happens), the client should have kept the 5498 reporting the 2019 contribution. The IRS also received it, so they should not be asking,