Roth IRA distribution before age 59 1/2 is taxable income?

Question

I'm doing my parents taxes. My mom for some reason decide to withdraw all of the money out of her Roth IRA. Well, now on her 1099-R sent by the bank, the distribution code is a J, early distribution from Roth IRA without known exception. I know she will get penalize that 10%, however, according to the IRS Form 1040 line 15 instruction. It said that the distribution is taxable unless the code is either T or Q. So it practically saying she will get tax on her distribution & get penalize 10% on top of that. My question is, am I reading this right? Roth IRA is your after tax money that you put in, why does the distribution become taxable now? Anything she can do to minimize this situation?

Answer 1

If there are no conversions less than 5 years old, the only part of a Roth IRA Distribution that is taxable and subject to the 10% penalty are the earnings.
If any part is a conversion less than 5 years old the portion that was taxable in the year of the conversion will not be taxable in the year of the distribution, but will however be subject to the 10% penalty for early distribution.
Report the full amount of the distribution on line 15A of the form 1040, the earnings are reported on line 15B.
Any penalty is accounted for on line 60 of the form 1040 and you need to complete part 3 of the Form 8606 and submit that with the 1040

Publication 590
http://www.irs.gov/publications/p590/index.html
Instructions to form 8606
http://www.irs.gov/instructions/i8606/index.html
http://www.irs.gov/pub/irs-pdf/f8606.pdf

UPDATE
TO Steven F's comment below

See Ordering Rules for Distributions page 61 of Publication 590
http://www.irs.gov/publications/p590/ch02.html#d0e10235

Answer 2

This Site Might Help You.

RE:
Roth IRA distribution before age 59 1/2 is taxable income?
I'm doing my parents taxes. My mom for some reason decide to withdraw all of the money out of her Roth IRA. Well, now on her 1099-R sent by the bank, the distribution code is a J, early distribution from Roth IRA without known exception. I know she will get penalize that 10%, however,...

Answer 3

Rob is correct the publication 590 states the following

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What If You Contribute Too Much). Order the distributions as follows.

Regular contributions.

Conversion contributions, on a first-in-first-out basis (generally, total conversions from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion contributions into account as follows:

Taxable portion (the amount required to be included in gross income because of conversion) first, and then the

Nontaxable portion.

Earnings on contributions.

Disregard rollover contributions from other Roth IRAs for this purpose.

Answer 4

As I understand the rules, the portion of the distribution that represents your mothers contributions to the Roth IRA are not taxed (except for the 10% penalty). The portion that represents the EARNINGS is subject to tax as regular income. The link below, IRS Publication 590, has a section an taxable vs non-taxable withdraws from Roth IRAs.

Rob appears to be wrong about the 10% penalty only applying to earnings. I reread Pub 590 three times and can't find such an exception.

Answer 5

Distribution Code J

Answer 6

Yes, you are reading that correctly. She now has to pay ordinary income tax on the distribution and a 10% early withdrawal penalty on the earnings. The only way she won't have to do this is if she meets one of these qualifications:

Occur because of the IRA owner's disability. (This can be a very narrow definition, so if you get a severe paper cut, don't consider a Roth IRA distribution for a disability until you review IRS Code Section 72(m)(7) and IRS Publication 590.)


Occur because of the IRA owner's death.


Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.


Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).


Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.


Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).


Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.


Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.



Notice the name of the site I found these qualifications at, fool.com, pretty funny!