June, 2018

**A Taxpayer's Duty to Report a
Roth IRA Distribution**

A person who withdraws funds from a Roth IRA, including an inherited Roth IRA, must always report such withdrawal on his or her federal income tax return. It does matter if the distribution from the Roth IRA is tax free or it is taxable. The person must report it on his or her federal income tax form. Some individuals incorrectly believe since their Roth IRA distribution is qualified and is not taxable, that it need not be reported on their tax return.

This article discusses the various IRS tax forms to be completed by the Roth IRA owner or Roth IRA beneficiary who withdraws Roth IRA funds. The individual will either complete Form 1040, 1040A or Form 1040NR. For purposes of this article, the completion of 2017 Form 1040 will be discussed and assumed that the Roth IRA distribution occurred during 2017 since the IRS has not yet released many of the 2018 tax forms.

The IRA custodian must prepare the 2017 Form 1099- R to report all IRA distributions occurring during 2017 on a per plan agreement basis as long as such distributions during the year totaled $10 or more on. Such distributions might come from a Roth IRA, traditional IRA, SEP IRA or SIMPLE IRA. The distribution codes used to describe the Roth IRA distribution are generally different from the distributions used to describe distributions from traditional IRAs, SEP IRAs and SIMPLE IRAs. Although the IRA custodian is not required to prepare the Form 1099-R if the IRA distribution is less than $10, the IRS asks IRS custodians to still prepare the Form 1099-R and report such amount. This implies that an individual has the duty to report all IRA distributions on their tax return, including those less than $10.

The individual is to complete lines 15a and 15b of Form 1040 to report his or her IRA distributions. Line 15a is used to report the gross amount of the distribution Line 15b is used to report the amount the person is required to include in their income (i.e. the taxable amount). best that the IRA custodian has a plan of action to have each of the affected IRA owners find a new IRA custodian and then transfer such IRA funds.

The individual has the duty to complete lines 15a and
15b to report his or her Roth IRA distributions. The are
four basic Roth IRA distribution situations.

Situation #1. The Roth IRA distribution is qualified and
the Roth IRA custodian knows it is qualified. That is, the
Roth IRA owner is over age 59 1/2 and has had their
Roth IRA for 5 years or longer with the Roth IRA custodian.
The Roth IRA custodian will prepare the 2017
Form 1099-R to show a reason code Q in box 7, the
gross amount in box 1 and a box 2a is to be left blank.

The individual is to complete lines 15a and 15b as follows. Line 15a is to be completed with the gross amount shown in box 1 of the Form 1099-R. The Q means her distribution was qualified. Line 15b is to be completed with 0.00 because the distribution is qualified.

For example, if a Roth IRA owner who was age 60 and who had her Roth IRA with the Roth IRA custodian for 10 years withdrew $8,000 from her Roth IRA during 2017 and her Roth IRA custodian furnished her with a 2017 Form 1099-R with $8,000 in box 1 and a reason code Q in box 7, then line 15a of her Form 1040 must be completed with $8,000 (i.e. the gross amount set forth in box 1 from Form 1099-R) and line 15b is to be completed with 0.00. Form 8606 and Form 5329 do not need to be completed.

Situation #2. The Roth IRA distribution is qualified, but the Roth IRA has not been in existence at the current Roth IRA custodian for 5 years. The Roth IRA custodian will prepare the 2017 Form 1099-R to show a reason code T in box 7, the gross amount in box 1 and box 2a is to be left blank. The individual is to complete lines 15a and 15b as follows. Line 15a is to be completed with the gross amount shown in box 1 of the Form 1099-R. The Q means her distribution was qualified. Line 15b is to be completed with 0.00 because the distribution is qualified. The IRS instructions for Form 8606 expressly state that Part II of Form 8606 does not need to be completed for this situation.

For example, if a Roth IRA owner who was age 60 and
who had her Roth IRA with the Roth IRA custodian for
only 3 years withdrew $8,000 from her Roth IRA, then
this Roth IRA custodian will furnish her with a 2017
Form 1099-R with $8,000 in box 1 and a reason code T
in box 7. The T indicates the distribution was non-qualified.
However, this person had established another
Roth IRA with another Roth IRA custodian 10 years age.
This means for her tax purposes all Roth IRA distributions
to her are qualified as the five year rule has been
met because she is over age 59 1/2. Thus, she should
complete line 15a of her Form 1040 with $8,000 (i.e.
the gross amount set forth in box 1 from Form 1099-R)
and line 15b is to be completed with 0.00. In this situation
she wants to attach a written note explaining why
the distribution is qualified since the Form 1099-R indicates

it was non-qualified.

Situation #3. The Roth IRA distribution is not qualified, but Code T is the proper reason code for Form 1099-R purposes because the individual is age 59 1/2, but has not met the 5 year rule.

The Roth IRA custodian will prepare the Form 1099-R to show a reason code T in box 7, the gross amount is reported in box 1 and box 2a is to be left blank.

Since the distribution is non-qualified, the individual will need to complete Part Ill of Form 8606. Because it is a non-qualified distribution, the individual must use the tax ordering rules to determine if any portion of the distribution is comprised of any earnings. The distribution of any earnings must be report on line 15b and Form 5329 will need to be comcompleted if the individual is not yet age 59 1/2 or older.

The individual is to complete lines 15a and 15b as follows. Line 15a is to be completed with the gross amount shown in box 1 of the Form 1099-R. Line 15b is to be completed with the taxable amount, if any, determined on the Form 8606. See line 25c.

For example, John Doe has had a Roth IRA for 3 years. He is age 62. During 2017, he withdraws $18,000 of which $16,500 were his own contributions and $1,500 were the earnings. The Roth IRA custodian will prepare the 2017 Form 1099-R to show a reason code T in box 7, the gross amount in box 1 and a box 2a is to be left blank. John Doe must complete Part Ill of Form 8608. On line 25c he will indicate that he has taxable income of $1,500. He will also complete line 15b of Form 1040 with $1,500.

Because he is older than age 59 1/2, he will not complete
Form 5329 because it is inapplicable.
Situation #4. The Roth IRA distribution is not qualified,
but Code J is the proper reason code for Form 1099-R
purposes because the individual has not met the 5 year
rule and or is not yet 59 1/2, disabled or has not yet
died.
The Roth IRA custodian will prepare the 2017 Form
1099-R to show a reason code J in box 7, the gross
amount is reported in box 1 and box 2a is to be left blank.
Since the distribution is non-qualified, the individual
will need to complete Part III of Form 8606. Because it is a non-qualified distribution, the individual must use
the tax ordering rules to determine if any portion of the
distribution is comprised of any earnings. The distribution
of any earnings must be report on line 15b and the
individual will need to complete Part I of Form 5329
because he or she not yet age 59 1/2 or older. For example, Mary Doe has had a Roth IRA for 3
years. She is age 37. During 2017, she withdraws
$14,000 of which $12,300 were her own contributions
and $1,700 were the earnings. The Roth IRA custodian
will prepare the 2017 Form 1099-R to show a reason

code J in box 7, $14,000 in box 1 and a box 2a is to be
left blank.

She must complete Part III of Form 8608. On line 25c she will indicate that she has taxable income of $1,700. She will also complete line 15b of Form 1040 with $1,700.

Because she is younger than age 59 1/2, she must complete Form 5329 to indicate she owes the 10% tax on the $1,700 or $170. This is reported on line 59 of Form 1040 as set forth on the next page/column.

All Roth IRA distributions are to be reported on a person's federal income tax return. The above discussion makes clear a person who withdraws funds from a Roth IRA or receives a distribution from a Roth IRA must always report this Roth IRA distribution on their federal tax year for the tax year during which the distribution occurred. Some individuals incorrectly think that because their Roth IRA distribution is qualified and is not subject to being taxed that it need not be reported on their tax return.

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