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