Roth IRA distribution
My client wants to do a Roth IRA distribution. My understanding is if it’s a non-qualified distribution, it comes out principal first and it doesn’t matter what is used for. Qualified distributions waive the 10% for certain reasons. My client has contributed to their Roth since 2006 and is with their 3rd custodian. They’ve contributed $ 6,750 since being with the current custodian, but the cost basis is around $ 25,000. They want to do a $ 10,000 distribution. Will the custodian issue a 1099-R for the distribution of $ 10,000? I hope the current custodian won’t say $ 6,750 is principal and $ 3,250 is earnings. I am hoping they will issue a 1099-R and leave it up to my client and his accountant to track the cost basis.
Permalink Submitted by Alan - IRA critic on Tue, 2024-08-13 15:44
The 1099R will not include any amount in Box 2a, the taxable box. The client will have to complete Form 8606 to report the NQ distribution, and the amount of regular contribution basis will be entered on line 22. If that amount (derived the client’s own tracking of their basis) exceeds 10,000, the distribution will be non taxable and penalty free. If it does not exceed 10,000, then the amount of conversions goes on line 24. Conversions come out using the oldest conversion first, but if conversions are tapped within 5 years, the 10% penalty will be due unless client qualifies for a penalty exception.
Hopefully, client has been keeping track of their contribution basis, which is apparently 25,000.
Permalink Submitted by Robert Roselli on Tue, 2024-08-13 16:36
There have been no conversions. I have all the contributions from the prior custodian and current custodian and the cost basis is at least $ 17,400. We are good. I have told my client we need to reach out to the first custodian and get a transcript so we have an accurate cost basis.
Permalink Submitted by Alan - IRA critic on Tue, 2024-08-13 17:22
If client retained the 5498 forms showing Roth contributions that would also suffice.