Reporting distributions that were contributions

[Guest gzwick26]

Hello,

Last year I needed to take out the $20,000 I had put in contributions over the years....I left in the amount that was the profit. I am trying to enter the information on taxcut but it gives me a penalty each time because it is being characterized as an early distribution. I know that I'm allowed to take out the contributions at any time penalty-free. Does anyone know where to report it and how? Thank you very much.

[J Simmons]

... I know that I'm allowed to take out the contributions at any time penalty-free.

Why's that?

[jevd]

Roth IRA or Traditional IRA ?

You may only do that in a Roth IRA.

[Guest gzwick26]

This is a Roth Ira.

[jevd]

Check the software your using to be sure you indicated the distribution was from a Roth IRA.

Check instructions for form 8606 also. The software should pick that up if you indicate the distribution is from a Roth IRA.

I'm not familiar with Tax cut as I use a CPA and don't mess with it myself.

Also, if the Roth was funded by a conversion that is less than five years old, then you may be subject to penalties even though tax was already paid at conversion.

[Guest gzwick26]

I didn't have any conversion. These are simply contibutions that I took out... not sure where and how to report it so it doesn't come up as a penalty on Taxcut.

[jevd]

I don't know Tax Cut but you should be able to indicate the distribution was from a Roth IRA. That should briing up a form 8606 to complete which should then indicate no tax on the distribution. If it doesn't then you should contact "Tax Cut" for instructions.

Anyone out there use this software and have any idea how to help this poster?

[K2retire]

Were you over age 59 1/2 at the time of the distribution? If not, that is why it is saying you owe tax.

If you are old enough, call the help number in the program. There are often small boxes that must be checked to make things work properly -- and they seem to hide in obscure places.

[Guest Eric.]

You said you never had any conversions from traditional to Roth and presumably no rollovers either, based on your posts. So, to be a "qualified distribution", you need to be 59 1/2, disabled, the distribution was made to a beneficiary because of your death (which, because you wrote the post, is also presumably not the case), meets a first home exception, or is made after the 5-year period beginning with the first taxable year for which a contribution was made.

If you meet one of those and the distribution is, in fact, a qualified distribution, then you have either not selected the correct options in the tax program, Tax Cut is handling it wrong (isn't this an HR Block product? ... that's like going to quick check and expecting a quality latte), or the 1099 itself could be coded wrong and you entered the (incorrect) coding from your 1099. I believe the software likely has an over-ride option, but I strongly recommend that you do not use it unless you are 10,000% certain as to the propriety and taxibility of your distribution.

(edited for a vowel that escaped)

[Guest gzwick26]

I am able to make a withdrawal penalty free because I only withdrew the contributions. I was asking if anyone knew how to report that this was only contributions on Taxcut. I am not 59 12/ but don't need to be.. contributions can be withdrawn at any time.

[Bill Presson]

I am able to make a withdrawal penalty free because I only withdrew the contributions. I was asking if anyone knew how to report that this was only contributions on Taxcut. I am not 59 12/ but don't need to be.. contributions can be withdrawn at any time.

That's where you are wrong. To be tax free they still have to be a "qualified distribution".

[Guest gzwick26]

But when you take money out of a Roth IRA, the first dollars you take out are considered to be a return of your regular contributions. You don't have to meet any special tests to receive those dollars free of tax. You can take them out any time, for any reason, without paying tax or penalties.

I am not wrong.

[John G]

Some of folks above either did not understand the circumstances or do not understand the Roth rules.

The original post talked about withdrawing contributions. Subsequent posts by this original author indicated this was from a ROTH account and did not involve a Roth conversion.

Let me refer to IRS Publication 590 on IRAs. Under the Roth topic "Are Distributions Taxable" (page 65 in my 2007 version)... the very first sentence:

"You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."

So, if your Roth contributions equaled or exceeded 20K, then you can remove 20K without penalty or tax. There is no 5 year rule that applies. There is not age test. There are no penalties. A contribution can withdrawn at any time, for any reason. (ok, let me say "reluctantly withdrawn", because its not easy to put the same funds back in)

I unfortunately can not solve your software problem. Check how your custodian treated the removed funds. You could say zero for distributions, then attach a letter to your return indicating that you had a Roth transaction but it was exempt from taxation because it was a withdrawal of contributions....in other words a work around for the software.

[jevd]

Some of folks above either did not understand the circumstances or do not understand the Roth rules.

The original post talked about withdrawing contributions. Subsequent posts by this original author indicated this was from a ROTH account and did not involve a Roth conversion.

Let me refer to IRS Publication 590 on IRAs. Under the Roth topic "Are Distributions Taxable" (page 65 in my 2007 version)... the very first sentence:

"You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."

So, if your Roth contributions equaled or exceeded 20K, then you can remove 20K without penalty or tax. There is no 5 year rule that applies. There is not age test. There are no penalties. A contribution can withdrawn at any time, for any reason. (ok, let me say "reluctantly withdrawn", because its not easy to put the same funds back in)

I unfortunately can not solve your software problem. Check how your custodian treated the removed funds. You could say zero for distributions, then attach a letter to your return indicating that you had a Roth transaction but it was exempt from taxation because it was a withdrawal of contributions....in other words a work around for the software.

John G is correct. See instructions for line 15A & 15 B on page 23 of 1040 instx. 1040 Instx The instructions will refer you to form 8606 8606 Instx Form 8606

[Guest gzwick26]

thank you. This isa Roth Ira. I put in $20,000 in contibutions over the years and it was valued at $23,000. I took out the $20,000(contributions) and was just trying to get advice on how to correctly report it. I know that I'm able to take them out at anytime.

[jevd]

thank you. This isa Roth Ira. I put in $20,000 in contibutions over the years and it was valued at $23,000. I took out the $20,000(contributions) and was just trying to get advice on how to correctly report it. I know that I'm able to take them out at anytime.

Your welcome.

Does your software have a means to report it correctly? I'd ask for a refund if it doesn't.

Regards & Good Luck

[Guest Eric.]

Re: You could say zero for distributions, then attach a letter to your return indicating that you had a Roth transaction but it was exempt from taxation because it was a withdrawal of contributions....in other words a work around for the software.

*Almost* : on your 1040, line 15A should reflect the entire amount of the distribution and then 15B (*taxable portion of* distribution) can then reflect zero - and you can attach your letter. As a CPA, I'm advising you - don't just reflect a zero in both boxes because you will stand a greater chance of the IRS coming back to you since you have a 1099 - that is ALSO in their system - that says you have an amount that should be reflected on your Return. Trust me, the IRS' first step will not be to look for the letter you attached. However, correctly reflecting both the dist. and the zero taxable number gives even the casual eye a tip off that you considered the number and didn't just skip reporting it (keep in mind, the IRS doesn't know what it is until after they have looked into it..). This highlighting is ONE OF the reasons (there are other reasons unrelated to this/your particular item) the form is setup that way.

No matter what, if this is just a straight-up 100% return of your contributions, you would be able to explain it away, so no disturbance to your wallet, but why open yourself to the potential associated hassle/holdup.

[K2retire]

What does your 1099-R show for the taxable amount of the distribution? What distribution code does it show? Is the "taxable amount not determined" box checked?

After you provide those answers I'll look in my copy of Tax Cut to see if I can figure it out.

[John G]

Eric, mea culpa! I should have looked at the reporting procedure before making my suggestion. I stand corrected about the better way to handle this.

Now if only someone who knows the software would post!

[Guest Eric.]

John - happens, right? I had a client who brought in his prior year's Return and a letter from the IRS concerning the (this) Return that he never filed. ... Uhm, he hadn't put his name, address and SS# on the Return. Now those fields are a tad bit more obvious. Good stuff!

I haven't used this particular tax product so I didn't want to suggest - but as far as I'm aware, most of the do-it-yourself tax products work very similarly. Usually, if one clicks on the line item's field, where the numbers would belong, on the face of the Return (as opposed to the input forms), the program leaps to the correct input form and usually lands on the section of the input form or worksheet that relates to the box. The input form may likely have a check box available that says "Roth IRA - Return of Contribution"

[Guest gzwick26]

Thank you very much for trying to help me. I'm going to try and figure it all out this weekend. I'll let you know how it works out. Thanks again.

[K2retire]

I've used TaxCut ever since it was created. If you'll answer the questions I asked on March 25, there is a very good chance I can figure it out for you. It most likely has to do with the way those fields on the 1009-R are completed.

[Bill Presson]

Thank you very much for trying to help me. I'm going to try and figure it all out this weekend. I'll let you know how it works out. Thanks again.

Sorry I missed part of the rules. I should have known better than to comment on IRA's.

[Guest gzwick26]

My 1099-r.. box 2b is checked- taxable amount not determined....box 4 says... 88001375387 and box 7 says j.....

I only took out the contributions.... J says its an early distribution....when I enter the information on taxcut, it is treated as a huge penalty.. I don't see anywhere to report that it was simply a return of contributions.

[Bird]

I think you'll just have to override the software and put the full distribution on line 15a and 0 as the taxable amount on line 15b. Or contact Tax Cut to find out how to get to the same place. You're right about the (non) taxation of the distribution, but there's no way to report it as a return of contributions when you file; you simply say that it's not taxable.