Closed a roth IRA and withdrew the money. There were no capital gains or losses it was after tax contributions so I should not pay tax on it. How do I file?

[ColeenD3 · Accepted solution]

You will get a 1099-R reporting the distribution. Enter the form exactly as it appears.

Roth IRAs are taxable under certain circumstances. 

You can always withdraw contributions (but not earnings) that you made to your Roth IRA tax and penalty free at any time. Additionally, the Ordering rules for withdrawals from a Roth IRA are: first from regular contributions, then from Conversion and rollover contributions, on a first-in, first-out basis and finally from Earnings on contributions.

Please note: A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as "basis") from your Roth IRA without penalty.

When you are entering this information into TurboTax, your Form 1099-R, box 7 codes J, Q and T identifies a Roth IRA distribution and determines the tax treatment. If you have a J or a T, the distribution is considered taxable unless there is an exception. TurboTax will guide you on all the exceptions.

[Opus 17]

Tax free?  Hardly.

If you withdrew only your contributions, that is not taxable.  Any increase in value over your contributions is potentially taxable, depending on the rules mentioned by the other expert.  It won't be reported as capital gains, because how the increase in value occurred is not considered and does not affect the tax that might be owed.  I suppose you could have invested in something that paid no interest, no dividends and did not gain in value, but that would be a pretty useless investment.  

The increase is taxable if the withdrawal is not qualified.  To be qualified, the IRA must have been open at least 5 tax years, and you must be age 59-1/2 or older.  

Open 5 tax years works like this:  Suppose you opened the account in January 2017, using a retroactive contribution for 2016.  That makes 2016 year 1, so 2020 is year 5, and you would meet the 5 year rule.  However, suppose you opened the account in 2018, and closed it in 2020.  That's only 3 years. 

[carolineshan1]

Thanks Coleen

My account was setup and the funds taken out and closed, there  was never any activity in it. It looks like my broker used a distribution code of 1 in box 7 on the 1099-R form. Turbo Tax keeps treating the funds as taxable and reducing the refund amount.

[Opus 17]

@carolineshan1 

I’m not sure how this is entered in TurboTax, if this was really a Roth IRA it seems like it should be code J1 not just code 1.

You have something like five days to cancel the contribution if you completely change your mind, and I’m not sure you even get a 1099 in that case. If it was more than five days but you never invested the money and it didn’t pay interest, then the contributions should not be taxable. Either the trustee used the wrong code, or you are missing one of the questions in TurboTax. Since I am not familiar with exactly how this is handled in the program, I will ask for a helper.

@dmertz @macuser_22 

[dmertz]

Code 1 is never used when reporting a distribution from a Roth IRA.  Code 1 with the IRA/SEP/SIMPLE box marked indicates an early distribution from a traditional IRA, not a distribution from a Roth IRA.

The entire distribution from a traditional IRA is taxable unless you have basis in nondeductible traditional IRA contributions.  Perhaps you actually made nondeductible contributions to a traditional IRA, not contributions to a Roth IRA, in which case your tax return would need to include Form 8606 Part I on which the taxable amount of the distribution would be calculated.