As a follow-up, a distribution from a Roth where the 5-year rule has not been met, but for other reasons, such as being inherited, the 10% early withdrawal penalty does not apply, or the beneficiary is 598.5 or older, is still a "Non-Qualified Distribution" so one needs to know how to apportion or allocate the monies received between what is non-taxable and what is taxable.The "ordering rules" for IRA distributions, Traditional or Roth or otherwise, specify that the monies coming out in a withdrawal are:First, the "basis" - being the monies on which taxes have already been paid:non-deductible contributions made, orfunds contributed to a Roth as a result of a Conversion of a taxable IRA to a Roth IRAThen the income generated within the account, and on which taxes have not been paid.In the specific case of a Roth IRA which does not meet the 5-year rule, and is Non-Qualified, but in other respects is not subject to other penalties, if one withdraws a small proportion of the total account value, it would typically be the case that the monies might be all basis and so no tax is imposed. This means that you, the account holder need to keep track of two amounts:The total monies paid in (contributed) on which taxes have already been paid - from non-deductible contributions or from a conversion to a RothThe total monies withdrawn by distribution.So long as, after the year's distributions are made, the Total #1 is still greater than the Total #2, the monies distributed are not subject to taxation. Note that State-level taxation is a separate topic, and totally state-dependent.

Question

On 1099R, in box 7, there is a "T" for "ROTH IRA distribution, exception applies". What exception? Is this distribution taxable or not?

Forum|Forum|6 years ago
June 7, 2019
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D

dmertz

Employee

A code T 1099-R is reporting a distribution from a Roth IRA that is not subject to early withdrawal penalty but the financial institution issuing the 1099-R does not know if the 5-year holding period to make the distribution a qualified (and therefore entirely tax free) distribution has been met. If the 5-year holding period has not been met, any portion of the distribution that represents earnings will be taxable. If you (or in the case of an inherited Roth IRA, the original owner) had any Roth IRA prior to 2009, the 5-year holding period has been met and entire distribution is qualified and not taxable.

ScruffyCurmudgeon

Employee

Clarification: The Five-Year Rule relative to an Inherited Roth IRA is a totally separate clock from a 5-year clock on Roth IRAs held in your own name, so that it is possible for a personally-held Roth IRA distribution to be Qualified, even while a distribution from an Inherited Roth IRA may be non-qualified.

If this posted response is useful to you, please click on the upraised hand in the lower left of this post. Thank you. Scruffy Curmudgeon--PFFM/ IAFF, retired FireFighter/Paramedic - Locals 718/30, Veteran USAR O3 AIS/ASA '65-'67 NOT INTUIT EMPLOYEE USAR 64-67 AIS/ASA MOS 9301 - O3 - Just donating my time**Say Thanks by clicking the thumb icon in the lower left corner -it means nothing but makes those than answer feel wanted.

ScruffyCurmudgeon

Employee

As a follow-up, a distribution from a Roth where the 5-year rule has not been met, but for other reasons, such as being inherited, the 10% early withdrawal penalty does not apply, or the beneficiary is 598.5 or older, is still a "Non-Qualified Distribution" so one needs to know how to apportion or allocate the monies received between what is non-taxable and what is taxable.

The "ordering rules" for IRA distributions, Traditional or Roth or otherwise, specify that the monies coming out in a withdrawal are:

First, the "basis" - being the monies on which taxes have already been paid:

non-deductible contributions made, or
funds contributed to a Roth as a result of a Conversion of a taxable IRA to a Roth IRA

Then the income generated within the account, and on which taxes have not been paid.

In the specific case of a Roth IRA which does not meet the 5-year rule, and is Non-Qualified, but in other respects is not subject to other penalties, if one withdraws a small proportion of the total account value, it would typically be the case that the monies might be all basis and so no tax is imposed. This means that you, the account holder need to keep track of two amounts:

The total monies paid in (contributed) on which taxes have already been paid - from non-deductible contributions or from a conversion to a Roth
The total monies withdrawn by distribution.
So long as, after the year's distributions are made, the Total #1 is still greater than the Total #2, the monies distributed are not subject to taxation.

Note that State-level taxation is a separate topic, and totally state-dependent.

If this posted response is useful to you, please click on the upraised hand in the lower left of this post. Thank you. Scruffy Curmudgeon--PFFM/ IAFF, retired FireFighter/Paramedic - Locals 718/30, Veteran USAR O3 AIS/ASA '65-'67 NOT INTUIT EMPLOYEE USAR 64-67 AIS/ASA MOS 9301 - O3 - Just donating my time**Say Thanks by clicking the thumb icon in the lower left corner -it means nothing but makes those than answer feel wanted.