I took a distribution of my contributions that are older than 5 years old. I received my 1099 and it has it listed as code J and am now being taxed on it. what code should it be and how do I rectify this so at is not listed as taxable income.
Don't worry, we can probably fix this if you meet all the rules.
Here are the rules for regular Roth accounts
First, here are the IRS's rules about ROTH distributions.
A qualified distribution from a designated Roth account is excludable from gross income. A qualified distribution is one that occurs at least five years after the year of the employee’s first designated Roth contribution (counting the first year as part of the five) and is made:
- On or after attainment of age 59½,
- On account of the employee’s disability, or
- On or after the employee’s death.
If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs. To determine if there is income that has to be included in income you must follow the "ordering rules".
If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed under What if You Contribute Too Much? in chapter 2 of Pub. 590-A). Order the distributions as follows.
Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:
Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
Earnings on contributions.
Disregard rollover contributions from other Roth IRAs for this purpose.
The custodian doesn't know how much of your distribution is return of basis. You'll have to provide that information.
Here's how you do that in TurboTax Deluxe:
- After you have entered your 1099-R you'll come back to the screen
- Your 1099-R Entries >> Select >> Continue
- Owned Any Roth IRA for Five Years? >> Select >> Yes >> Select >> Continue
- Were Any Roth IRAs Open? >> Select >> Yes
- Withdraw from Your Roth IRA Before 2016 >> Select >> Yes/No
- Enter Prior Year Roth IRA Contributions >> Enter as appropriate >> Select > Continue
- Any Roth IRA Conversions? >> Select >> Yes/No
- Do You Have any Excess Roth Contributions >> Select >> Yes/No
If your distribution was in the Roth account for at least 5 years, and you took out no earnings, then none of your distribution is includable in earnings. It is not subject to tax or early distribution penalty
The rules are somewhat different for "Designated Roth accounts" that are separate accounts in a 401(k), 403(b) or governmental 457(b) plan that holds designated Roth contributions. If you need that information, please post another question.
Very informative. I'm getting the sense I don't have to worry about TurboTax Roth IRA work sheets appearing off as it relates to cumulative contributions.
If someone is in their sixties, started Roth contributions many years ago and then starts taking small distributions (no where near what I've contributed) I shouldn't have anything to worry about from a tax perspective.
That sound about right?
Yes, that's right. The only reason that you might need to know your contribution and conversion basis in the future is if you make a full distribution of all of your Roth IRAs after 2025 and you have unrecoverable basis in Roth IRA contributions and conversions due to poor overall investment performance, but that's quite unlikely.
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