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Hi,
Just wondering why a friend of mine doesn't need to pay a penalty for early distribution of his Roth IRA. In Turbo Tax he has a 1099-R filled out and before choosing the Box 7 code he did show a much higher tax due. But as soon as he choose code "J" for Box 7, the extra tax due disappeared and it went back to what he owed prior to entering the 1099-R. Does this make sense?

There was no exception chosen, like first time home buyer, etc.

Thanks,
RB
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Just wondering why a friend of mine doesn't need to pay a penalty for early distribution of his Roth IRA. In Turbo Tax he has a 1099-R filled out and before choosing the Box 7 code he did show a much higher tax due. But as soon as he choose code "J" for Box 7, the extra tax due disappeared and it went back to what he owed prior to entering the 1099-R. Does this make sense?

It never makes sense to look at that ridiculous "Watch your refund grow" number, which is meaningless until the return is complete. It will be banned when I'm crowned Emperor.

As to whether this particular distribution should result in any tax or penalty liability, there's not enough information to venture an opinion.

Phil
Rule Your Retirement Home Fool
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The watch your refund grow works great for me. I like to see how a particular item affects the bottom line as I go.

The return was DONE except for that one item. Very simple return. Just a W2 and this 1099-R. The refund grew a lot just by clicking the Box 7 "early distribution" option. With that choose there is NO penalty or tax on the Roth IRA early distribution. I can't figure out why. I Googled and don't see any exception for his simple case. And even if there were, there was no exception information included in the return in Turbo Tax.
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I believe that you can always withdraw the contribution amount from your Roth IRA; so perhaps the J code indicated it was a withdrawal of the individuals contribution? And, of course, if he is over 59.5 and the plan was more than 5 years in existence he should be able to withdraw any amount tax free.

JimA
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RBMunkin,

You wrote, The return was DONE except for that one item. Very simple return. Just a W2 and this 1099-R. The refund grew a lot just by clicking the Box 7 "early distribution" option. With that choose there is NO penalty or tax on the Roth IRA early distribution. I can't figure out why. I Googled and don't see any exception for his simple case. And even if there were, there was no exception information included in the return in Turbo Tax.

I'm not a tax expert, but what was in Box 2A? From what I can tell, this is the important part of a 1099-R. What's more, the IRA administrator can put an X in Box 2B to indicate that the taxable portion is unknown. This gives the administrator the option to not maintain a taxable cost basis and leave it up to your friend to figure out.

Finally, the 10% penalty only applies to taxable earnings on his contributions that were withdrawn. If he didn't earn much, the penalty might not be much either - even though he may have withdrawn everything. Also, your friend and/or the administrator are probably counting the earnings as the last thing withdrawn, which means he may have just withdrawn principal from his original contributions.

- Joel
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I'm not a tax expert, but what was in Box 2A? From what I can tell, this is the important part of a 1099-R.

For all IRA distributions Box 2a should be blank and the Taxable Amount Not Determined box checked unless the custodian has sufficient information to code a Roth distribution as qualified (not done in OP's case). This is because all IRA accounts are lumped when considering the taxability of a distribution, and no one custodian can be sure of having all the relevant information.

That's what's supposed to happen. I just got the 1099-R for a conversion I did. Box 2a showed it fully taxable, and the "not determined" box was checked. Oh well.

Whether OP has sufficient information to determine what, if any, income or penalty applies we don't know. We definitely know such information hasn't been presented here. The rules are in Chapter 2 of Pub 590, but we don't know the facts of what happened other than TT looked odd.

Phil
Rule Your Retirement Home Fool
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Did he enter his Roth IRA contributions into Turbo Tax? It has to assume zero unless the amount is entered. If he taken previous distributions, then the amount would be the total contributions minus previous distributions.

Contributions can be withdrawn without penalties at any time. There is a waiting period for conversions.

Look at the tax forms, and not just the refund amount.

I used Turbo Tax one year to handle a ROTH IRA distribution. It wasn't intutive how to enter the contributions.
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I'll take a look at his TT file and forms. Thanks.
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