1099-R for Higher Education

[Sean 1969]

I took a $9370 distribution from my Roth IRA to cover expenses for higher education.  While I was able to select this correctly in the program, and it said there was no penalty, my Tax Due increased by $2249 for this particular 1099-R entry.  Trying to understand why my tax liability increased so much?

[AnnetteB6 · Accepted solution]

Even though the early distribution penalty would be waived for a Roth distribution used to pay expenses for higher education, your basis in the account must be considered when determining if any income tax is owed on the Roth IRA distribution.

If the total distribution was less than your basis in the account, then the distribution would not be subject to income tax.  If the total distribution is greater than your basis, then that indicates that you are taking a distribution of some earning in the Roth IRA.  The earnings portion of the early distribution is subject to income tax.  This could account for your increased tax liability.

Be sure that you have entered the basis of the Roth IRA into TurboTax in order for the distribution to be treated correctly.

Use the information below to do so:

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner)
• This opens a box where you can type in “Roth IRA” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to Roth IRA”
• Click on the blue “Jump to Roth IRA” link

This will bring you to a screen with check boxes to indicate what types of account you had in 2020.  Be sure that Roth IRA is checked.  Click Continue. 

If Traditional IRA is checked or if you have a spouse that had either type of account, the next questions will not pertain to your Roth IRA.  Continue through this section until you are asked whether you made any contributions to your Roth IRA for 2020.  This is the beginning of the section where you will enter details about your Roth IRA, including the basis.

Continue answering the questions according to your situation.  On the screen where you see Let Us Track Your Roth IRA Basis, click Yes. 

Then, on the screen titled Enter Prior Year Roth IRA Contributions, this is asking for your total contributions for years prior to 2020 (basis).  If your basis exceeds your distribution, then the distribution will not be taxable.  If the distribution exceeds your basis, then the excess will be taxable.

Finish the rest of the follow-up questions about your Roth IRA.