1099-R, Code 4 Question

[krwetw]

I have a non-spousal inherited Roth IRA from a relative who died in 2020.  Everything I see online, and have been told by my financial advisor, indicates that disbursements I take from this account, if done in the 10 years following death, are non-taxable.  This year I received a disbursement of $7,000.  The 1099-R I received lists that amount in boxes 1 and 2a.  2b is checked as is the IRA/SEP/SIMPLE box.  Box 7 code is 4.

When I entered this 1099-R into Turbo Tax, my projected refund dropped by approximately $1,500, and when I look at the income summary, the $7,000 disbursement is being listed as income.  Can anyone explain what's going on and provide suggestions on how to get Turbo Tax to not view this as income?  I did read in another post that I need to be aware of confusing wording on the question about is the IRA inherited from the payer (financial company is listed as opposed to relative).  I initially said no, but have changed to yes, which then allows me to list my relative's name.  Both approaches to that question resulted in the same loss in my refund total.

[FangxiaL]

There is no penalty if you are under 59 1/2, but if it is a Traditional IRA funded with pre-tax dollars, you will be taxed on the distribution. 

[krwetw]

Do you have any insights on how to get Turbo Tax to quit acting like there is a penalty?  It is a Roth IRA and I am less than 59.5.

[DanP0428]

The penalty applies if you are under 59-1/2 

[krwetw]

Thanks for replying. With changes in the SECURE Act of 2019, a non-spousal inheritor of a Roth IRA has 10 years to disperse all funds in the IRA if the person died in 2020 or later. In this case, the original owner of the IRA was not old enough for required minimum distributions to apply to them as yet. The 59.5 rule doesn't apply to a beneficiary in this case (https://www.irs.gov/taxtopics/tc557). But, specifically, what I'm trying to get at is why Turbo Tax is considering the dispersement from the inherited Roth IRA as taxable income.

[macuser_22]

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@krwetw wrote:
Thanks for replying. With changes in the SECURE Act of 2019, a non-spousal inheritor of a Roth IRA has 10 years to disperse all funds in the IRA if the person died in 2020 or later. In this case, the original owner of the IRA was not old enough for required minimum distributions to apply to them as yet. The 59.5 rule doesn't apply to a beneficiary in this case (https://www.irs.gov/taxtopics/tc557). But, specifically, what I'm trying to get at is why Turbo Tax is considering the dispersement from the inherited Roth IRA as taxable income.

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There is no early distribution penalty for an inherited IRA.   However, the box 1 amount is fully taxable as ordinary income for  an inherited Traditional IRA as your 1099-R indicated it is.  This is NOT a Roth IRA as you said the "IRA/SEP/SIMPLE" box is checked, and a code 4 is NOT for an inherited Roth.  It should increase your AGI but the box 1 amount and will increase your tax (and reduce any refund).

[fanfare]

@macuser_22 

 What is the distribution code for a non-spouse Inherited Roth IRA ?

[krwetw]

That's a good lead.  I think the form may have been filled out wrong then, as the inherited IRA was definitely a ROTH, not a traditional.  Thanks!

[krwetw]

Further digging into Turbo Tax help for box 2a implies that for a Roth, box 2a should have been $0.  Between that and the checked IRA/SEP/SIMPLE box being checked, I'm thinking the 1099-R was completed inaccurately.  I'm checking with my financial advisor.  Just to experiment, when I adjust those two fields in Turbo Tax, I go back to getting the refund amount I was expecting.

[macuser_22]

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@fanfare wrote:

@macuser_22 

 What is the distribution code for a non-spouse Inherited Roth IRA ?

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Either a "Q" or "T" (T if the IRA custodian does not know if the 5 year rule has been met.)

[rusty2021]

I am the Adm of my brother's estate. I received a 1099 form with a distribution code 4. The ira/sep box is checked. The account was closed to settle the estate and the funds were distributed to a beneficiary who is 90 years old. I withheld 20% of the funds for taxes before distribution.  I'll have to file a 1041 for the estate. How should this income be reported? There were some losses on the sale of the stocks held in the account. Will the money provided to the beneficiary be taxable?  Thank you.

[RobertB4444]

A 1099-R represents payouts from a retirement account.  An inheritance of money and property is probably not taxable - after all, the person who has passed paid taxes on that money while they were alive.  But money that is in a retirement account is different.  They didn't pay taxes on that before they passed and now you get to.

When you're looking at the 1099-R the taxable amount is box 2a.  The total amount paid out is in box 1.  Often, they're the same number.  Because the 1099-R has been issued to the estate instead of the beneficiaries you are left with two choices (although you have to file an estate tax return in both) - 

You can have the estate pay the taxes due.  Then you just file the return and pay the bill.  OR

You can file the return and list every beneficiary on the return.  Then you can pass thru the income to those beneficiaries and they will pay the taxes on their personal tax returns.  You will have to issue each beneficiary a form called a K-1 so that they know how much to report.

@rusty2021 

[dmertz]

This income is reported on Form 1041 line 8, Other Income.  It's also reported in box 5 of the beneficiary's Schedule K-1 (Form 1041) for taxation on the beneficiary's individual tax return.  Capital losses will be passed through separately in box 3 or 4 as appropriate.

It was a mistake to have taxes withheld.  The credit for tax withholding cannot be passed through on the Schedule K-1, so the estate will need to receive any tax refund it is due and will pay that to the beneficiary when it is received.