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ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

My husband died in 2015 and I inherited his IRA certificates. I cashed in his ROTH certificate ($20,506.31) and one of my ROTH certificates ($17,136.55) to pay for the down payment on a house. When I received the 1099R from the bank, it stated that the gross distribution was $29,645.78 but that the taxable amount is "undetermined".  So, when figuring out the taxable amount, shouldn't the inherited ROTH IRA and my ROTH IRA be determined separately? Are the rules different? Do I use a different formula for his amount than mine or should I just use the full $29,645.78 to figure the taxable amount? BTW, I am 55.


1 Best answer

Accepted Solutions
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Since there is only one Form 1099-R, it appears that the Roth IRA custodian transferred you husband Roth IRA into your own before making a distribution to you of $29,645.78.  The movement of the $8,000 to a new Roth IRA was treated as a nonreportable trustee-to-trustee transfer.

Because you are under age 59½, the $29,645.78 distribution is not a qualified distribution and one would expect the Form 1099-R to have code J in box 7.  The taxable amount must therefore be calculated on Form 8606 Part III.  Enter the Form 1099-R into TurboTax under Wages & Income -> Retirement Plans and Social Security -> IRA, 401(k), Pension Plan Withdrawals (1099-R) exactly as it appears.  Indicate that you did not inherit this IRA.  Do not indicate that any amount was moved to another retirement plan; indicate that all of it was used for something else.  If you are not a qualified first-time homebuyer, do not indicate that any of this was used for a first-home purchase.  Initially TurboTax will treat this distribution as entirely taxable and subject to a 10% early-distribution penalty, but that will change once the taxable amount is determined.  After entering the Form 1099-R, click the Continue button on the Your 1099-R Entries page and answer the questions on the pages that follow.  In particular, when TurboTax asks for your Roth IRA contributions prior to 2016, enter the combined amount contributed by both you and your husband.  (The transfer of your husband's Roth IRA into your own resulted in the transfer to you of his Roth IRA contribution basis as well).  Answer similarly if any of the money in the Roth IRAs was the result of any Roth conversions.  TurboTax will then prepare Form 8606 to calculate the amount of the distribution that was in excess of the amount of these contributions, leaving the remainder as taxable and subject to the 10% early-distribution penalty (unless you have a penalty exception that applies).

If you are a qualified first-time homebuyer, any amount that would otherwise be taxable, up to $10,000, you'll want to indicate to TurboTax was used for a first-home purchase.  If you or your husband made a first Roth IRA contribution for some year prior to 2012, this will make this portion tax and penalty free.

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14 Replies
VolvoGirl
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Where did the 29,645 come from?  Just 1 IRA or both?  Because his 20 + your 17 equals 37,000.
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

If these were distributions from two different Roth IRA CDs, it seems that there should be two Forms 1099-R for you to enter into TurboTax.

Many Roth IRA custodians state in their custodial agreement that a spouse beneficiary of the Roth IRA will automatically be treated as owner upon the death of the original owner.  It's *possible*, but unlikely, that upon the death of your husband the custodian combined these investments into a signal account and both the distributions were then treated as coming from the same account, resulting only a single Form 1099-R being issued for the combined distributions.  However, the numbers still don't add up, as VolvoGirl noted.

What is the code in box 7 of each of the Forms 1099-R that you received?
Did all of these distributions occur in 2016?
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Both iras added up to 29,645. I reinvested 8000 into a new Roth Ira for myself because I was told that would save me on taxes, although I may have been misled.
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

I have a single 1099-R for $29,645 and the code in Box 7 is J.  

Now that I look closely at it, the account number listed on the 1099-R is my "Roth share account." It appears that the 2 IRAs were combined into 1 account and then withdrawn except for $8000 which was put into a new Roth certificate.  Is that typical?

As for being a first time home buyer, I'm pretty sure I don't qualify.  I owned a condo before I was married but it was seller financed so I didn't have a mortgage.  When I was married, we jointly owned our townhouse.  This is my first solo ownership but I paid off the mortgage.  Does any of that matter?

THANK YOU for all your help and advice! I hope to tackle this tomorrow.
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

"Is that typical?"

It's not uncommon for a single account to contain multiple investments, although in the case of IRA CDs, some custodians prefer to treat each CD as a separate account.  In this case, the code J indicates a distribution from your own account, not from an inherited account maintained as an inherited account.  The amount distributed indicates that the custodian transferred your husband's Roth IRA to your own Roth IRA, probably automatically under the terms of the Roth IRA custodial agreement, and then made the distribution from your own IRA.

For the purpose of an IRA distribution, qualified first-time homebuyer is one who has not had an ownership interest in a primary residence within the 2-year period ending on the date of the acquisition of the new home.  The distribution form the IRA would then need to be used for the first-home purchase within 120 days following the distribution.

If the contribution basis in your Roth IRAs (including the contribution basis you acquired from you husband through inheriting his Roth IRA) is greater than or equal to $29,645, the distribution from the Roth IRA is tax and penalty free no matter what you used the money for.  Otherwise, the amount of the distribution in excess of your Roth IRA basis will be subject to tax and early-distribution penalty (unless some penalty exception applies).
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Do you think it would be worthwhile to request 2 new 1099Rs from the bank that reflects the different accounts?
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

No.  There is no benefit to doing so and there is no reason to except that bank would honor the request.
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

THANK YOU SO MUCH FOR YOUR HELP!

One more question, if I may:

According to Turbotax:  

A distribution from a Roth IRA is a qualified distribution if the following conditions are met:

First, the distribution must be made after the five-year period beginning with the first tax year for which a regular or conversion contribution was made for your benefit. (Our last contribution to a Roth was in 2010.)

Second, the distribution must be... (4) made to purchase a first home, subject to a lifetime limit of $10,000. (Even though I have been part owner in the past, I (we) have never claimed the $10,000 credit, so don't I qualify? )

Turbotax is worded in such a way that it is confusing.  

MANY THANKS!
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Since you've met the 5-year holding period, for these to be qualified distributions you would have to be over age 59½ (you are not), disabled (I assume that you are not), dead (you are not), or you meet the requirements to be a first-time homebuyer.

TurboTax's help often oversimplifies the tax code to the point of being misleading or erroneous.  Not having used up the $10,000 lifetime limit on the exception (not a credit) previously is only one of the requirements.  For the purpose of an early distribution from an IRA, to be a first-time homebuyer you (and, if married at the time of the purchase, your spouse) must not have had any ownership interest in a home at any time during the 2-year period ending on the date of the acquisition of the new home, you must use the distribution for the first-home purchase within 120 days following the day of the distribution, and you cannot exceed the $10,000 individual lifetime limit on using the first-time homebuyer exception.  If you were a part owner of a home within the 2-year period ending on the date of acquisition of the new home, you don't qualify for the exception.
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

MANY MANY Thanks dmertz!
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

I hope you don't mind but I have two more questions:

1. Box 5 of the 1099-R "Roth contributions" is empty.  Should I put both my husband's and my Roth contributions in there even though the bank did not?

2. If so, should the number be his contributions ($15,000) + my contributions ($13,000) MINUS the $8000 I reinvested in a new Roth IRA or should I include the $8000 in the final number?

Thanks again!
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

No.  Because a Roth IRA custodian has no way to know about contributions you or your husband might have made to Roth IRAs at other custodians, it's *your* responsibility to track Roth IRA contribution basis, not the Roth IRA custodian's responsibility.  A Form 1099-R for a distribution from a traditional or Roth IRA will never have an amount in box 5 and, if you do enter an amount in box 5, TurboTax will ignore it.  You must tell TurboTax your Roth IRA basis by answering TurboTax's follow-up questions that ask about basis.

Because your husband's Roth IRA was transferred to your own Roth IRA, your husband's Roth IRA contribution basis has transferred to you as well.  If your husband had made $15,000 in regular contributions to his Roth IRAs and you had contributed $13,000 to your Roth IRAs, your net contribution basis for years prior to 2016 is $28,000.  Since your distribution was $29,646, the first $28,000 will be a distribution of your combined contribution basis and the remaining $1,646 will be a distribution of earnings, taxable and subject to a 10% early-distribution penalty unless a penalty exception applies.  The result on your Form 8606 should be:

Line 19: $29,646
Line 21: $29,646
Line 22: $28,000
Line 23: $1,646
Line 25: $1,646 (becomes included on Form 1040 line 15b or Form 1040A line 11b)

Note that this leaves you with zero net contribution basis going forward from 2016.

Assuming no penalty exception, the result on your Form 5329 should be:

Line 1: $1,646
Line 3: $1,646
Line 4: $165 (propagates to Form 1040 line 59)

(I've assumed that you have no basis from Roth conversions)
ebarwick
Returning Member

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Oh my gosh!  Thank you so much! You couldn't have made this easier for me! THANK YOU!
dmertz
Level 15

Are the rules for determining the taxable amount of a roth ira distribution and an inherited roth ira distribution different? They are combined on the 1099R. (I am 55.)

Since there is only one Form 1099-R, it appears that the Roth IRA custodian transferred you husband Roth IRA into your own before making a distribution to you of $29,645.78.  The movement of the $8,000 to a new Roth IRA was treated as a nonreportable trustee-to-trustee transfer.

Because you are under age 59½, the $29,645.78 distribution is not a qualified distribution and one would expect the Form 1099-R to have code J in box 7.  The taxable amount must therefore be calculated on Form 8606 Part III.  Enter the Form 1099-R into TurboTax under Wages & Income -> Retirement Plans and Social Security -> IRA, 401(k), Pension Plan Withdrawals (1099-R) exactly as it appears.  Indicate that you did not inherit this IRA.  Do not indicate that any amount was moved to another retirement plan; indicate that all of it was used for something else.  If you are not a qualified first-time homebuyer, do not indicate that any of this was used for a first-home purchase.  Initially TurboTax will treat this distribution as entirely taxable and subject to a 10% early-distribution penalty, but that will change once the taxable amount is determined.  After entering the Form 1099-R, click the Continue button on the Your 1099-R Entries page and answer the questions on the pages that follow.  In particular, when TurboTax asks for your Roth IRA contributions prior to 2016, enter the combined amount contributed by both you and your husband.  (The transfer of your husband's Roth IRA into your own resulted in the transfer to you of his Roth IRA contribution basis as well).  Answer similarly if any of the money in the Roth IRAs was the result of any Roth conversions.  TurboTax will then prepare Form 8606 to calculate the amount of the distribution that was in excess of the amount of these contributions, leaving the remainder as taxable and subject to the 10% early-distribution penalty (unless you have a penalty exception that applies).

If you are a qualified first-time homebuyer, any amount that would otherwise be taxable, up to $10,000, you'll want to indicate to TurboTax was used for a first-home purchase.  If you or your husband made a first Roth IRA contribution for some year prior to 2012, this will make this portion tax and penalty free.

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