How do I get my 1099-R Line 7 Code J change to T or different code advice

[LR24]

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.

[DavidD66]

You are correct that if you enter a code different than what is in Box 7 of your Form 1099-R it will cause an issue.  It won't match IRS records and they will send you a letter proposing changes to your tax return.  You can't make the amount of your distribution that exceeds your basis non-taxable with a code J in Box 7.  The only good solution to your issue is for Vanguard to issue you a corrected Form 1099-R with Code T.  You might want to request a supervisor or manager if you can't get the issue resolved with a customer service representative.

Another, and much less desirable option would be to report your current 1099-R and use code T in box 7.  When the IRS proposes a change to your tax return to make 100% of the amount of the distribution in excess of basis taxable, you can respond and argue that it should not be taxable because of your disability.  I don't recommend this approach. 

[LR24]

Thank you DavidD66,

After further review of IRS "instructions for Forms 1099-R, Table 1 Guide to Distribution Codes, Code Q seems to fit best:

Use Code Q for a distribution from a Roth IRA if you know that the participant meets the 5-year holding period and:

• The participant has reached age 59½,

• The participant died, or

• The participant is disabled.

Code T is very similar:

Use Code T for a distribution from a Roth IRA if you do not know if the 5-year holding period has been met but:

• The participant has reached age 59½,

• The participant died, or

• The participant is disabled.

Thank you so much for your response, either code yields the same tax result for me but Q is more appropriate.  I'm speaking with a Vanguard Rep at the moment, they are trying to direct me to self certify with by using form 5329. I may update with results later, I'm asking them to tell me what Vanguard needs from me to correct their 1099-R 

[dmertz]

Because there is no tax withholding on the From 1099-R, the details of your entry are not included in your filed tax return and this will be transparent to the IRS.  This means that you could change the code to T when entering this form in TurboTax.  Otherwise, this situation can only be handled in forms mode of the desktop version of TurboTax where it's necessary to mark the box labeled If box 7 code is J or T, check if qualified distribution.  Step-by-step mode does not provide a way to mark this box.

No matter what method you use to cause TurboTax to treat the distribution as a qualified distribution, you'll also likely need to include with your filed tax return an explanation statement and documentation (generally a letter from a physician) supporting your claim of disability.

You can try to get Vanguard to change the code to T, but most financial institutions will decline to determine your disability status and will not change the code from code J.

[LR24]

Seems the desktop version is more robust than the online version.  Is it more expensive? Can you still file online (not mail)?  I'm getting online forced into premier level and state.