I received 1099 R for my wife Roth IRA and it has distribution code J. Trying to understand why it has distribution code J since Roth IRA distribution is tax free.

[karimfahad]

when I took distribution from Roth IRA, I was not asked the reason for distribution and now its marked as early distribution. Trying to understand why this happened.

[ColeenD3 · Accepted solution]

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.

Please refer to this IRS link for more information about Roth IRAs:

Roth

[Opus 17]

• You can withdraw contributions at any time.
• If you withdraw earnings, the withdrawal might be qualified or unqualified.  Qualified means the account owner is over age 59-1/2 AND the account is open more that 5 years.  
• If you make an unqualified withdrawal and you are any age, you pay income tax on the earnings.
• If you make an unqualified withdrawal and you are under age 59-1/2, you also pay a 10% penalty on early withdrawals unless you qualify for an exception.
• The ordering rules mean that any time you withdraw from a Roth, you are first considered to withdraw contributions, rollovers second, and earnings last.

Code J means the withdrawal is not qualified (your wife is under age 59-1/2 or the account was opened less than 5 years ago).  Turbotax should ask you for the amount of contribution and rollovers you made to the account and the amount of previous withdrawals, so the program can tell if you are withdrawing contributions, rollover contributions, or earnings.  You will pay income tax and maybe the penalty if you are withdrawing earnings. 

[BDUBYAC]

The often repeated online Roth IRA withdrawal statement of "you can always take out the contributions to a Roth IRA penalty and tax free" is never quite answered in the way I have made contributions to a Roth IRA.  This post and questions goes deeper than what is typically found online and gets into the Mega Back Door Roth IRA concept.

Going one step further in this thread about Roth IRA withdrawal and Code J and getting more detailed about the SOURCE of the contributions funds in the Roth IRA.  Typically, Roth IRA contributions done by one sending after tax dollars (from your checking about) to a custodian and the tracking of the contributions is straighforward.  But, for the Mega Back Door Roth strategy i.e. making after tax contributions to the company 401k and then (at the end of each year) rolling them over to an IRA makes is more compicated.   The after tax funds in company 401k were taken out (i.e. rolled over) to:

1) Roth IRA for the after tax contributions i.e. the basis, 

2) Traditional IRA for the earnings on the contributions.

No taxes were due on either any of these roll overs because they went into the appropiate IRA (Roth or Traditional).  This was done in 2021, 2022, and 2023.   I view the funds put into the Roth IRA the same as if I sent the funds directly to the custodian from my checking account - but this is where I may be wrong and am not clear (thus this post).

Now, leaving aside completely the Traditional IRA and focusing on the Roth IRA.  For sake of this example, applying an amount to the funds that are after tax contributions (first made to the 401k but due to roll overs now sitting in the Roth IRA) of $50,000.   The balance of the Roth IRA is (example again) $55,000.  I want to withdraw the "contributions" of my Roth IRA i.e. the $50,000.  I think (this is the question I'm trying to confirm) I am able withdraw the $50,000 of the Roth IRA (without tax or penalty), because they are the contributions / basis.  The $5,000 earnings needs to stay in the account.  The "rub" is that the funds were first in the 401k and then moved to the Roth IRA and I can't find if this makes a difference to the ability to withdraw the contributions tax or penalty free.

Also:

1) I'm not 59 1/2.

2) Not going to use funds for first home

3) Not for death or disability.

Meaning, if I take the $50,000 out of the Roth IRA, it will be a non qualified withdrawal and will get a Code J (I've already gotten this confirmation from the IRA custodian).

Final point, I've had Roth IRAs for well over 5 years and understand the IRS views all of my Roth IRA accounts as one "fund", though I have multiple Roth IRA - the example above was special purpose Roth IRA created for the purpose of doing this mega back door strategy.  So, if the 5 year rule applies, that has been met.

In summary, questions are:

1) Is the Roth IRA withrawal of the $50,000 still a PENATLY FREE and TAX FREE withdrawal even though the funds were after tax contributs but originally in the 401k but and now in the Roth IRA?

2) How is a withraw like this reported in Turbotax? 

[dmertz]

@BDUBYAC , the $50,000 of after-tax money rolled over to your Roth IRA became basis in nontaxable conversions.  With only that and $5,000 of investment gains earned within your Roth IRAs, under the Roth IRA distribution ordering rules the $50,000 of nontaxable contribution basis comes out first, free of income tax.  IRA distributions that are free of income tax are also free of any early-distribution penalty.

After entering the code-J into TurboTax, click the Continue button on the page that lists the Forms 1099-R that you have entered.  TurboTax will then ask you to enter or confirm your basis in regular Roth IRA contributions and your basis in taxable and nontaxable conversions.  TurboTax will then use this information to prepare Form 8606 Part III to determine that the $50,000 distribution is nontaxable.

[amalia1]

"You can always withdraw contributions (but not earnings) that you made to your Roth IRA tax and penalty-free at any time. "

This is not a true statement if there are qualifications for this:  I took out ONLY what I contributed to my Roth and now because of these qualifications I'm being taxed.

A qualified distribution vs non-qualified distribution---  What is this statement about? What makes it qualified?  

[dmertz]

Qualified distribution are those made after you reach age 59½, become disabled or die, and it has been more than 5 years since the beginning of the year for which you first made a Roth IRA contribution.  Any other distribution is a nonqualified distribution.

Regarding always being able to take out your contributions free of tax and penalty, there are no qualifications being able to do that.

When you receive a nonqualified distribution, the taxable amount is required to be calculated on Part III of Form 8606 where your contributions will be taken into account.  Be sure that TurboTax knows the amount of your contributions and Roth conversions by clicking the Continue button on the page that lists the Form1099-R that you have entered and enter or confirm your contribution and conversion basis when asked.