On 1099R, in box 7, there is a "T" for "ROTH IRA distribution, exception applies". What exception? Is this distribution taxable or not?

[dmertz]

A code T 1099-R is reporting a distribution from a Roth IRA that is not subject to early withdrawal penalty but the financial institution issuing the 1099-R does not know if the 5-year holding period to make the distribution a qualified (and therefore entirely tax free) distribution has been met.  If the 5-year holding period has not been met, any portion of the distribution that represents earnings will be taxable.  If you (or in the case of an inherited Roth IRA, the original owner) had any Roth IRA prior to 2009, the 5-year holding period has been met and entire distribution is qualified and not taxable.

[ScruffyCurmudgeon]

Clarification:  The Five-Year Rule relative to an Inherited Roth IRA is a totally separate clock from a 5-year clock on Roth IRAs held in your own name, so that it is possible for a personally-held Roth IRA distribution to be Qualified, even while a distribution from an Inherited Roth IRA may be non-qualified.

[mwloomis]

If held more than 5 years and is non-taxable - how is entry into Lacerte done? Code T and $0 entered as Taxable, still shows on return as taxable income.

[ScruffyCurmudgeon]

As a follow-up, a distribution from a Roth where the 5-year rule has not been met, but for other reasons, such as being inherited, the 10% early withdrawal penalty does not apply, or the beneficiary is 598.5 or older, is still a "Non-Qualified Distribution" so one needs to know how to apportion or allocate the monies received between what is non-taxable and what is taxable.

The "ordering rules" for IRA distributions, Traditional or Roth or otherwise, specify that the monies coming out in a withdrawal are:

1. First, the "basis" - being the monies on which taxes have already been paid:
1. non-deductible contributions made, or
2. funds contributed to a Roth as a result of a Conversion of a taxable IRA to a Roth IRA
2. Then the income generated within the account, and on which taxes have not been paid.

In the specific case of a Roth IRA which does not meet the 5-year rule, and is Non-Qualified, but in other respects is not subject to other penalties, if one withdraws a small proportion of the total account value, it would typically be the case that the monies might be all basis and so no tax is imposed.  This means that you, the account holder need to keep track of two amounts:

1. The total monies paid in (contributed) on which taxes have already been paid - from non-deductible contributions or from a conversion to a Roth
2. The total monies withdrawn by distribution.
3. So long as, after the year's distributions are made, the Total #1 is still greater than the Total #2, the monies distributed are not subject to taxation.

Note that State-level taxation is a separate topic, and totally state-dependent.

[wtmmalsch]

Very good analysis. Thank you.

[Bjo]

Did ypu ever figurd this out, same happened to me. And it doesnt make sense to have to do form 8606 and claim amount as basis.

[dmertz]

If at the time of the distribution it had been less than 5 years since the beginning of the year for which you first made a Roth IRA contribution, Form 8606 is required to report a code T distribution.  If it had been more than 5 years, make sure to click the Continue button on the Your 1099-R Entries page and be sure to answer Yes when 2019 TurboTax asks if you contributed to a Roth IRA before 2015.

[koecpa]

To personalize your very helpful response about withdrawals from Roth conversions,  I am over 72 and in 2019 and 2020, I converted $100,000/year from a traditional IRA to a Roth and paid tax each year on each $100,000 conversion distribution. 

Is it correct to say my tax basis in the converted Roth is now $200,000 and in 2021, I can withdraw up to $200,000 without penalty or tax? Thanks so much.

[dmertz]

koecpa, (ignoring any financial-institution imposed early-withdrawal penalties if the investments in your Roth IRAs are CDs) yes, you can take $200,000 out of your Roth IRAs tax and penalty free.  There is never an early-distribution penalty at age 72 and you've already paid income taxes on this $200,000.  If the Roth conversion in 2019 established your first Roth IRA, it will be 2024 before you can take out any earnings that occurred in your Roth IRAs without having to pay taxes on the earnings.  Earnings come out after all of the converted amounts. 

[koecpa]

Thank you so much, I really appreciate the advice.

[Brach1]

The purpose of Form 8606 (Part III) is to compute the amount of UNQUALIFIED distributions from Roth IRAs that is taxable. If your 1099-R shows code J or T, TurboTax will assume that the entire distribution shown in Box 1 is an unqualified distribution. In general, the Payer of the distribution doesn't know whether the distribution is qualified or unqualified because the Payer doesn't know what other Roth IRA accounts you might have elsewhere and when you made contributions or conversions to those accounts. The burden of determining whether the distribution shown on your 1099-R is qualified or not qualified is entirely on you the taxpayer.

Also, keep in mind that every time to take a distribution from your Roth IRAs, you must subtract the amounts that were distributed from your  Basis in Contributions and Basis in Conversions.

[geezermike]

Re: If > 72, Roth IRA held more than 5 years, no contributions to Roth and therefore a distribution is non-taxable, I understand that the "Basis in Roth conversions" is reduced by the amount of the distribution, but what is the effect on the "Basis in Roth Contributions" if there were none?

geezermike

[dmertz]

geezermike, unless previously distributed, there must be basis from either contributions or conversions.  If there is no basis regular contributions, then the only basis would be from Roth conversions and your Roth IRA contribution basis would be zero.

Since you are over age 59½ and have had a Roth IRA more than 5 years, distributions are qualified distributions, not reported on Form 8606, your basis (either contribution basis or conversion basis) is largely irrelevant and you don't need to enter it.