I received a total distribution of an inherited qualified annuity. Why is TT computing a 10% penalty tax on form 5329? Isn't there an exception for inherited IRAs?

[DawnC]

The code(s) in Box 7 of your 1099-R helps identify the type of distribution you received.   We use these codes and your answers to some interview questions to determine if your distribution is taxable or subject to an early withdrawal penalty.   The death of the participant/IRA owner is an exception to the early withdrawal penalty.   What is the code on your 1099-R?

Inheriting an IRA

[akers4]

The code is T which is why I don't think it should be completing a form 5329. 

When I go back in to review my answers to the questions re: that annuity, I always have to reenter the date it was opened ("during 2018")...it's like it hasn't saved the answer...whereas on the other ones, my previous responses are still there.

[AmyC]

You need to make it clear to the program that this was an inheritance since the form 1099-R does not make it clear. The code T is used for a Roth when it is unknown if the 5 year holding period was met but with several factors, including the participant died. 

Income to the decedent would be income to you. There is no penalty for death, a code 4 for form 5329.

The program holds most information, however, when there is a particularly important question, it removes the information when you return to the screen. This is one of those cases. The date is critical so the program is forcing you to enter it each time you visit that screen.

See Form 5329 instructions.

See Retirement Topics - Beneficiary | Internal Revenue Service which states: Inherited Roth IRAs

Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

[akers4]

How do I get the program to treat it as an exception?  I've already answered that it was an inherited annuity.  

It only asks me "Did you use your IRA to pay for any of the following expenses?"  Death is on there, but the money wasn't used for that, it was received because of my father's death.  Do I put the amount of the distribution in that box?

[AmyC]

You have the T, you marked inherited, you entered the name and date of death. The program asks for the taxable amount, mark that you received the RMD and you should be done. I don't know why you are going past that point. I just created a 1099-R to match yours and have no 5329 showing up.

[akers4]

Amy, your responses are very helpful.  The reason I ended up here is because I entered what I thought was the correct value in box 2a from my 1099R because it was left blank.  When I initially left it blank and just answered the questions, I got to the review and it wouldn't finalize the return because there was nothing in those boxes.  I had assumed that the program would determine the taxable amount for me based on my answers to those questions.  I just went back in and left those boxes blank again.  When I do that, it takes away the penalty, but it will not let me finish because those boxes are blank.  When I talked to a live expert on the phone this past week, she told me that I had to enter something in those boxes so I needed to call Fidelity and find out what those values are.  I don't think Fidelity is going to tell me since they checked the box saying they did not determine the taxable amount.  She said that if they couldn't tell me, I should enter zero since it is blank, but I don't think that is correct.  Do you have any suggestions?  Do I have to enter a value for 2a?

[AbrahamT]

When you inherit a retirement plan from a deceased spouse or relative, depending on the type of plan and how the deceased made contributions, you may have to pay income tax on the plan's distributions.

A Form 1099-R will usually report a "Q" or a "T" in box 7 for an inherited Roth IRA account.

"Q" means that the holding period of five years for qualified distributions has been met, so the amount is not taxable as it is a qualified distribution.

"T" informs the IRS that the holding period was not met, but the distribution is exempt from the penalty for early withdrawal because it has been paid to a beneficiary. The initial withdrawn contributions are tax-free; however, distributed earnings are taxable.

In other words, whether you enter a 0 or you don't enter anything in Box 2A, it will tax you on the earnings which is the amount shown on Box 1 because it is considered an unqualified distribution based on the code T. You will not incur the penalty for early withdrawal because it was a inherited beneficiary.

You would need to know if the distributed earnings are indeed what is showing up on that Box 1 or it is some other amount because the program will tax that amount. No early withdrawal penalty will be added. 

[akers4]

Thank you for that answer.  I do have another question about the software. 

The annuities in question are qualified deferred annuities for which I received lump-sum distributions as the beneficiary.

  I filled in the taxable amount as the full amount of the distribution.  The program asks me if the money came from a Roth IRA.  When I answer Yes, I have the chance to say that it's an inherited IRA and give the name and date of death of my father.  Then the program asks when I first opened the IRA and says I will not be taxed on it if they opened it more than 5 years ago.  Does the program really mean to ask when did he first open the IRA?  This is confusing.

[DMarkM1]

The question is asking about when the Roth IRA was originally opened by your father.  If he opened it prior to 2018 it will not be taxable but if opened it during or after 2018 the amount will be taxable but without penalty.