Tax implecations of a withdrawal from a Roth IRA created in 2019 using funds from Military death gratuity

[Mark_Preib]

The Army survivor death gratuity of $100,000 based on the HEART Act was rolled into a Roth IRA in 2019. A distribution of $25,000 was also received in 2019. The HEART Act appears to say that this money can be put into a Roth IRA at any time and funds can be taken out at any time with no taxation implication (no taxes). However when the 1099-R is input into Turbo Tax Deluxe, unless any other IRA was created by my Wife specifically, all of the distribution gets taxed. This does not seem to represent the definition of the HEART Act for money distribution from a Roth IRA taken out the same year the Roth IRA was created?

[DaveF1006]

It may depend on the 1099R distribution code in Box 7.  If it is a code 7, then this is a normal distribution that is fully taxable. Roth distributions usually have a code B, Q, or T. Checked to see if this has any of those codes.  If not, you may need to request a corrected 1099R from the trustee.

[dmertz]

This distribution is nontaxable.  Presumably the Form 1099-R has code J (or possibly code T) in box 7 and the $0 taxable amount must be determined on Form 8606 Part III.  To allow TurboTax to prepare Form 8606 properly, after entering the Form 1099-R and answering the immediate follow-up questions, click the Continue button on the Your 1099-R Entries page.  When TurboTax asks you to Enter Prior Year Roth IRA Contributions, include the $100,000 rolled over to the Roth IRA from the military death gratuity.  The $100,000 is considered to be part of your Roth IRA contribution basis.

[Mark_Preib]

The Roth IRA was created with the $100,000 death gratuity just after received. The Roth did not exist before that, so there is no mixing of funds in this IRA. The money withdrawn was specifically part of the death gratuity money, no other.

[Mark_Preib]

B.T.W. a T is marked in the box 7.

[dmertz]

All of an individual's Roth IRA accounts are treated as a single Roth IRA for tax purposes, so it doesn't matter which of the receiving individual's Roth IRA accounts receives the rollover of the military death gratuity.

Regarding the $25,000 distribution from the Roth IRA , code T indicates that the distribution was received after reaching age 59½.  Click the Continue button on the Your 1099-R entries page and in the questions that follow indicate whether or not the individual who received this distribution first contributed to a Roth IRA for any year prior to 2015, then enter enter the individual's Roth IRA contribution basis to included the $100,000 military death gratuity.

[Mark_Preib]

My wife had no previous Roth IRA. I did (several via my company), but she did not. This IRA was in her name (mistake on her part, maybe).

[Mark_Preib]

This is how the actual Military lists the HEART act benefits: Below is exact military language.

The HEART Act permits Surviving Spouses who receive death gratuities and SGLI death benefits to invest some or all of the funds into a Roth IRA, thereby allowing the funds to grow tax-free, including when they are withdrawn or passed on their beneficiaries. Withdrawals are allowed, tax-free and without penalty, at any time up to the amount of the initial investment.

[dmertz · Accepted solution]

Just to be clear, I think we are talking a military death gratuity that she received and rolled into a Roth IRA in 2019 (her only Roth IRA), not a military death gratuity that you received, and she subsequently took a distribution from her Roth IRA in 2019.  Assuming that I have that correct, your own retirement accounts have no bearing on this.  Even if you had been the one who received and rolled over the military death gratuity, Roth accounts in employer-provided plans are not Roth IRAs and would still have no bearing on this.

The rollover of the military death gratuity by your wife to her Roth IRA became contribution basis in her Roth IRA.  Distributions from her Roth IRA of the amount up to the amount of the military death gratuity are then tax-free distributions of that basis.  Any amounts distributed beyond the the amount of the military death gratuity are earnings, generally taxable until she reaches age 59½ (which she apparently already has since the Form 1099-R has code T) and it has been at least 5 years since the beginning of 2019 (which would be 2024 since her first contribution to a Roth IRA was the rollover contribution of the military death gratuity).

Be sure to click the Continue button on the Your 1099-R Entries page.  When TurboTax asks if any of her Roth IRAs set up before 2015, answer No (since this was her first Roth IRA, opened in 2019).  Here's where TurboTax is misleading:  When TurboTax asks you to Enter Prior Year Roth IRA Contributions enter the amount of the military death gratuity rolled over in 2019 even though is was not done in a prior year.

[Mark_Preib]

Thank You very much!!

[dmertz]

Without any Form 5498 showing a regular contribution and no Form 1099-R showing a distribution from a designated Roth account in a qualified retirement plan as the source of the contribution basis, there is a chance that the IRS will question this rollover and its establishment of the contribution basis.  Be prepared to substantiate that the rollover was of a military death gratuity in case the IRS asks.  You might also consider including an explanation statement with you mailed tax return to potentially head off any such question by the IRS.