My 1099-R (Roth IRA) line 7 is listed as code J, the IRA/SEP/Simple box is not checked. Line 2a is blank and 2b is checked. A little Background the account is over 5 years old and I was under 59 1/2 years old when I took the distribution, however I am disabled and think therefore I meet the "qualified distributions" from IRS Pub 590B pages 25, 33, 34 (pg 34 flowchart Figure 2-1. Is the Distribution From Your Roth IRA a Qualified Distribution? answers yes, no, no, yes, conclusion "The distribution from the Roth IRA is a qualified distribution. It isn’t subject to tax."
Turbotax allows me to state I'm disabled and avoid the 10% early withdrawal penalty but it is taxing this distribution as ordinary income.
The following is from Fidelity web search
If you are younger than age 59½
- You can withdraw investment earnings without incurring penalties or taxes if your account meets the 5 year aging rule, as in, 5 years have elapsed between the beginning of the tax year of your first contribution to a Roth account and withdrawal of earnings. Your distribution must also be for a “qualified” reason, such as:
- You’re buying a home for the first time (you can withdraw up to $10,000 penalty-free)
- You’ve become disabled
My problem, IRS Form 8606 Part III does not cover disability, rather it discusses basis. My withdrawal exceeds my basis. therefore leading my distribution to be taxable.
If I change my code from J to T or Q in turbotax it is not a taxable event. But now my 1099-R from Vanguard (yes Vanguard) would not match my Turbotax entry and I suppose that could / would flag an audit. I'm getting a circular argument from Vanguard and Turbotax experts. Vanguard says under 59 1/2 we issue code J, your accountant can guide you on changes. Experts say, and I agree, we can't recommend you change a code that does not agree with the issuer as the IRS gets a copy of this too. Turbotax online does not give me an opportunity to make a notation regarding my logic for the change. The codes need to match Vanguard and Turbotax.
Conclusion, if disability status is a valid exception what code should it be? I'm guessing T. experts say Q is for over 59 1/2 and would not apply. Entering a code 3 Disability, makes turbotax charge me more in taxes? What would you suggest I present to Vanguard to cover themselves to issue a corrected 1099-R? I do receive a Form SSA-1099. I don't want to pay ordinary taxes on this distribution if it is not necessary.
Thank you, that was long, I just wanted to avoid too many follow up questions.
