If someone makes a withdrawal from a Roth IRA before 59 1/2 can they simply designate the entire amount withdrawn as contribution or must they apportion the withdrawn amount between contribution and gain? The amount withdrawn is considerably less than the contributions.
Thanks for the reply. I was certain withdrawls of contributions were always without penalty and taxation. How does one handle it when filing with one of the online services? I am filing for a family member and I thought I had it done, but their software added it to the taxable income plus it added a 10% penalty for good measure. Unfortunately the custodian withheld Federal and state taxes. How do I handle it as a qualified distribution?Last year using the same filing service for the 2022 return I attempted to have them submit the form 8606 for the contribution as a part of the return, but their software kept adding the contribution to the taxable income so I left it out and mailed in the 8606. I have a help ticket in to the filing service to see how they say to handle it, but I was curious if anyone here knew how to deal with it.
Make sure that the 1099R does not have the “IRA” box (box 7) checked, and when entering the 1099R into the tax program, be sure not to check that box. If the other code in Box 7 is the Roth IRA distribution code J, that should trigger Form 8606. Of course, then you will have to know the amount of regular contribution basis and the person may not have tracked that amount or kept prior 5498 forms issued by the custodian to report regular Roth contributions and conversion contributions. If the distribution was small enough that the person is sure that the regular contributions were greater, you may have to guess at the line 22 regular contribution total.
So if I include a form 8606 as a part of the online return will that automatically override the entries from the 1099-R?In their reply to my inquiry the filing service did not mention that as a solution.
Thank You. The 1099-R has box 7 with a distribution code of J. We have a 8606 [which was submitted by snailmail in 2022] showing that the amount of contribution/conversion is more than the distribution so it should be a qualified distribution. I will have to see what the tax filer service has to say and I may have to file using a different service. FWIW the custodian is a new custodian and may not have reviewed the account history.
The custodian will not review the account history, and even if they did the 1099R would still be coded J as an early distribution since the taxpayer was under 59.5. Note that while this distribution is non qualified, if the regular contribution basis is higher, it will be tax and penalty free. However, if the distribution is greater than the regular contributions, any conversions come out next in chronological order. If that includes any taxable conversions in the last 5 years, there will still be no tax, but there will be a 10% penalty on the taxable amount of any prior conversions. Evene the cheapest tax programs should have no trouble reporting this 1099R.
Thanks It’s highly likely that I didn’t handle it properly when going through steps in the filing process so I will wait for their CS to tell me how to properly report it.
As it turns out the distribution was a little more than the total contributions with the remainder coming from conversion funds so there should be a 10% penalty on the amount fom the conversion funds, the conversion amount was taxed in the year the conversion was done. Is a form 5329 required here? I assume this can all be taken care of by using the appropriately filled out 8606. Thanks
Yes, any 10% recapture tax for a distribution of taxable conversion amounts is reported in Part I of Form 5329.
Last question. It may not help for this distribution, but is it allowed to return a Roth distribution and if so is there a time limit for doing so? I’m aware that any taxes withheld would have to be reclaimed by filing so you would have to replace the entire gross distribution.
A 60 day rollover can be done for a Roth IRA distribution in the same manner as a TIRA distribution. However, you can only do one such rollover in a 12 month period for all your IRAs combined. You are correct about replacing any withhholding to complete the rollover, but it would be better to decline withholding in the first place. If only part of the distribution is rolled back to a Roth IRA, the portion not rolled back is reported on Form 8606 subject to the Roth IRA ordering rules, but in most cases the amount not rolled back would be non taxable.
Thanks for all of the excellent responses. I was a little in uncharted waters in terms of dealing with it through efile as this was a first for me, but I Got R Done.
Permalink Submitted by Alan - IRA critic on Mon, 2024-02-12 04:29
All non qualified Roth IRA distributions follow the Roth IRA ordering rules. Under those rules, the regular Roth contributions come out first (tax and penalty free), next out are conversions in chronologic order, and earnings come out last. Form 8606 asks for the regular contribution balance on line 22 and the conversion balance on line 24, but you must have tracked these balances in order to complete the 8606. SInce your distribution will be less than your balance of regular contributions, there will be no tax or penalty due, but you have to report the distribution on Form 8606. After your Roth is qualified (5 years and 59.5), all distributions are tax free and you no longer have to file the 8606.