Rule of 55 Roth distribution partially taxed - form 5329

Orange

I had a Roth distribution in 2024. On the 1099-R, the gains are listed as a taxable amount. But, given this is a from a qualified retirement plan, none of it should be taxable.

From the IRS website(https://www.irs.gov/instructions/i5329) I have to fill out a Form 5329. Quote:

• You received a distribution subject to the tax on early distributions from a qualified retirement plan (other than a Roth IRA) and you meet an exception to the tax on early distributions from the list shown later, but box 7 of your Form 1099-R doesn’t indicate an exception or the exception doesn’t apply to the entire distribution.

ie My 1099-R doesn't apply to the entire distribution as the gains are listed as taxable (box 2a) and my Distribution codes (box 7) are 2 B. FreeTax does flag the B as being rare…

Does FreeTax support this? If so, where in the flow would it be detected/questioned?

TriciaD

Hello Orange,

The rule of 55 applies exclusively to workplace plans, such as 401k and 403b plans, and does not extend to IRAs. However, the 5-year aging requirement does apply to Roth IRAs. 

If a Roth has gains in addition to contributions, distributions of those gains before the 5-year waiting period and early withdrawal will be taxable and may be subject to additional penalties. 

If the account has been held for at least five years after the first contribution, earnings can be withdrawn tax- and penalty-free. View page 31 for information about qualified distributions: https://www.irs.gov/pub/irs-pdf/p590b.pdf

The 1099-R form will have the year in Box 11 to report the year of the first Roth contribution. The software will recognize the year entered in Box 11 and report the IRA distribution as non-taxable. 

On the Income Summary screen, it will be shown that the IRA distribution is not included in the total income and does not have tax associated with it. 

For further questions, please sign into your account and contact Support for assistance.