Incorrect 1099-R on Roth liqudation
Roth Contribution was $2,000 ,several years ago in one mutual fund,liquadated it last year at $1,865(less than basis),accountants software is showing a taxable distribution and a tax income amount of roughly $740. Custodian says distribution code J(box7) is correct.Both boxes are checked in 2b. Since this Roth was liquadated at less than basis,it was funded with after tax dollars, it is a return of principal.. Maybe accountant does not know what to do? Maybe her software is not intuative enough?Am I wrong?Is 1099 wrong or maybe preparer does not know how to handle this? Any advice
Tks
Permalink Submitted by Alan Spross on Thu, 2011-04-14 22:21
The 1099R is correct, but the preparer is not entering the distribution correctly in her software.
The preparer has to enter the total regular contributions (and conversions) into the program. If there have been any prior distributions then the balance of regular contributions is reduced by those prior distributions. If there were no prior distributions or other contributions, then the entire distribution is tax free and Form 8606 would list the regular contribution total and arrive at this conclusion.
Note that this distribution can still be non qualified and be tax free. Moreover, if this was taxpayer’s only Roth IRA, she also has a potential misc itemized deduction for the loss of $135, but subject to the 2% of AGI limit.
Permalink Submitted by steve jackson on Thu, 2011-04-14 22:30
Please let me know what you mean by total regular contributions?Does that mean the $2,000 Roth contribution from 2 years prior. Yes this was the only fund in the only Roth IRA.
Thank you,
SJ
Permalink Submitted by Alan Spross on Thu, 2011-04-14 22:40
Yes, that was most likely a regular contribution based on the amount. But there is a small chance it was a conversion, and if it was a conversion there would be a 10% penalty to take the money out unless taxpayer is over 59.5. Form 8606 requires identification of the nature of that 2,000, either a regular contribution or conversion. If a regular contribution it comes out tax free, if a conversion there is probably a 10% penalty on the amount distributed.
There are a couple ways to tell what it was for sure. The custodian issued a Form 5498 some months after the contribution and that form shows whether it is regular contribution or conversion. The tax return for that year would have an 8606 on it if a conversion were done, and taxes would probably have been due for the conversion.