Form 1099-R for Roth Inherited Non-Spousal IRA
My daughter inherited a Roth IRA from her brother in 2009. Records and history is not available, but we strongly suspect the Roth was funded in the period 2002 to 2004 via a conversion of a traditional IRA or a direct Roth IRA purchase. The Roth IRA was established at Vanguard in 2009 via a trustee to trustee transfer and therefore Vanguard has no way of knowing exactly when it was originally funded.
For tax years 2009 and 2010 she received a 1099-R from Vanguard with code T (Roth IRA distribution, exception applies) in box 7 for the RMD she has taken each year. For tax year 2009 she reported the distribution amount on line 15a of Form 1040 and zero on line 15b. She made a note that no Form 8606 was required per line 15b instructions in the 1040 Instructions Book (page 24, exception 2a).
Is this the correct way to report the RMD? Will Vanguard ultimately change the distribution code once they hold the IRA for five years?
Tom D.
Permalink Submitted by Alan Spross on Wed, 2011-01-26 17:29
Tom,
Yes, Vanguard should change the code to Q in 2014 when they are sure the 5 year holding period has been attained. But this is not critical since the 1099R Inst do not require an 8606 once you know your Roth is qualified. Granted, the T code is more likely to generate a request from the IRS for evidence of the 5 year holding period than a Q code. I imagine that some custodians would provide the Q code if you submitted evidence of the 5 year holding period (eg Form 5498 or an IRA statement), and some would not no matter what you submitted to them. Don’t know where Vanguard falls on this issue.
Your daughter is reporting the RMD correctly, but if you can locate a document showing that the original Roth existed prior to 2005, it would be very useful if the IRS ever inquires about the T coded years.
Note that in most cases her distributions would be tax free anyway under the ordering rules if she limited them to RMDs because earnings come out last. However, without records the IRS could assume that your son might have withdrawn his contributions leaving only earnings, which would then be taxable. Since these records also do not exist, it adds further value to just being able to proof this Roth existed prior to 2005. That way the remaining amount of contributions needed to complete an 8606 will never be needed.
Permalink Submitted by tomd37 on Wed, 2011-01-26 17:33
Thank you Alan.
Tom D.