Inherited Roth IRA has not met 5 year rule, Code T or Code 4 on 1099?

Submitted by Matt Groome on Mon, 2023-03-13 17:55

A Father converted 150,000 from a traditional IRA to a Roth IRA in 2018. He passed away in 2020 when he was age 69. The Roth IRA was inherited by each of his three children…..50k to each by the end of 2020.

In 2022, a child takes a 5k distribution having not met the 5 year rule (2018, 2019, 2020, 2021, 2022). The custodian has coded the 5,000 as gross distribution, box 2a as 0 and box 7 with a Code “T”. The CPA is saying the the distribution is showing as taxable because an exception doesn’t apply for code T and that code 4 should have been used in conjunction with T (or instead of).

The code T exceptions seem to be age 59.5, has died or is disabled. The CPA is saying “has died” only applies to the original account owner in the year of death, not the inherited Roth IRA account owner and thus an exception doesn’t apply.

Question: does code T apply to an inherited Roth IRA account beneficiary or only the original account holder? If not, what is the proper combination of codes to use? T AND 4? or just 4? Any citation I can point the CPA and / or Custodian to?

Thanks.



Submitted by David Mertz on Mon, 2023-03-13 19:32

  • Code T by itself is correct.  Code T is not permitted to be combined with any other codes.  See page 17 the IRS instructions for Form 1099-R:  https://www.irs.gov/pub/irs-pdf/i1099r.pdf
  • It’s up to the beneficiary to determine the taxable amount.  Each beneficiary inherited their respective share of the conversion basis (presumably $50,000 each), so the $5,000 distribution in 2022 would be a nontaxable distribution of conversion basis.
  • The inherited Roth IRA will be qualified in 2023, so any amounts distributed in 2023 and beyond will be nontaxable.  The IRA custodian will probably still use code T rather than code Q, at least until 2025 (the fifth year following the year that the inherited IRA was established).


Submitted by Matt Groome on Tue, 2023-03-21 00:41

I really appreciate you responding to this question and providing guidance on how to approach. Love the Forum!



Submitted by Alan - IRA critic on Mon, 2023-03-13 21:47

In addition, because the beneficiary took a distribution prior to completion of the 5 year holding period, the beneficiary will have to report the distribution on Form 8606, showing a conversion basis of 50,000 on line 24. Because this basis is more than the 5000 distributed the distribution will be non taxable, but the CPA might not understand this. For distributions after 2022 for any of the beneficiaries, Form 8606 will not be needed since the distributions will then be qualified, even if reported with Code T.



Submitted by David Mertz on Mon, 2023-03-13 22:40

The Form 8606 for reporting this is one associated with the inherited Roth IRA, separate from any Form 8606 that would be used to report nonqualified distributions from the individual’s own Roth IRAs.  The instructions for Form 8606 are no help in telling one how to identify that the form relates to an inherited Roth IRA rather than one’s own Roth IRA, so I would probably put a notation at the top of the form.



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