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How to report 1099-R Roth IRA distribution correctly?

Dusty19

Withdrew all $23,000 from my Roth IRA in 2023 due to losing employment.

The Roth account was funded in 2021 from an QRP rollover. No other contributions were made.

Received 1099-R from my bank this year, code “J”. No taxes were taken out (taxable amount not determined).

While reporting, it brings me to a section for “Roth IRA/SEP/Simple Basis” and asks for “basis in Roth IRA contributions” and/or “basis in Roth IRA conversions”.

Is that referring to the ENTIRE history of the Roth IRA account, or just 2023? Would I enter the full $23,000 that was initially rolled into the Roth to open then account in 2021? Or leave it blank since no contributions or conversions happened in 2023?

The next prompt is then “Did you make any conversions from a traditional IRA or qualified retirement plan to a Roth IRA before 2023?”

The simple answer to that is- yes.

Then it asks me to enter the basis in Roth IRA conversions made before 2023. Would my basis in conversions be the entire $23,000 that was rolled into the Roth when it was initially funded in 2021? And would that fall under “Non-Taxable Portion” since the money in the Roth was post-tax?

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Comments

Henry

Hi Dusty19! I'd like to help you get this Roth distribution reported correctly. First, do you mind if I clarify the situation? You mentioned that you had a Qualified Retirement Plan (QRP), such as a 401(k) or a pension plan. Was your QRP a traditional or a Roth account?

Most QRPs are traditional (not funded with after-tax dollars). If it was traditional, here are some things to keep in mind:

A traditional QRP is funded with pretax income, meaning you contribute money before paying taxes on it. Taxes are deferred until you withdraw the funds during retirement.

In contrast, a Roth IRA is funded with post-tax dollars, where you pay taxes upfront before depositing the money. Withdrawals from a Roth IRA are tax-free.

When you roll over a traditional QRP into a Roth IRA, you generally pay income taxes on the rollover amount in the year of the switch. The total transferred amount will be taxed at your ordinary income rate. This gives you basis in the Roth IRA. Did you pay taxes on the QRP distribution in 2021 when you made the conversion? That would generally show on line 5b of your 2021 Form 1040.

When it comes to entering the 1099-R information in the software, you are asked about your basis so that we can determine the taxable amount of your distribution. Those questions are asking about the entire history of the Roth IRA and not just your 2023 transactions. Roth IRA contributions are post-tax dollar amounts that you contributed directly to the Roth IRA account, whereas Roth IRA conversions are amounts that were held in a non-Roth IRA account and moved into a Roth IRA.

If you had a traditional QRP that was rolled into a Roth IRA, and you paid taxes on the QRP distribution at the time of the rollover, then you would generally have basis from a Roth IRA conversion and would want to enter the applicable amount in the boxes provided for that. On the other hand, if you didn't pay taxes on the QRP distribution at the time of the rollover, then you may not have basis in the Roth IRA.

You can click on the little blue question marks in the software if you need further clarification regarding what is considered the 'Taxable Portion' vs the 'Non-Taxable Portion.'

I hope this helps to clarify things. Keep in mind that if you made an early withdrawal, as the code J on your 1099-R suggests, you will likely incur a 10% penalty.

JohnPascucci

Have a 1099-R with a gross distribution of $.09 that is automatically rounded to zero with federal taxes of zero, and the "taxable amount not determined" box checked but the FreeTaxUSA software does not accept this and tells me to fix it, even though it also tells me that it will do the calculation on the amount taxable. Therefore, I am unable to enter this 1099-R. SO what do I do??????

KristineS

https://community.freetaxusa.com/discussion/comment/3898#Comment_3898

Hi JohnPascucci,

Great question and what an unusual amount for a distribution.

In this particular case, you're correct our software will not accept less than a $1 distribution. On your tax return this will not make any difference. I am comfortable recommending you don't need to report it.

JohnPascucci

Thanks. I will do as you recommend.

I would hope but do not expect a software modification to save the original amount entered before it is rounded and accept the 1099-R transaction when the amount is greater than zero. That way the IRS will be pleased since the it will match what the brokerage company sends them.

KristineS

Hello again,

Our software automatically rounds up at .50 and greater, and rounds down for .49 and less. The IRS does this as well. The IRS also has a $1 tolerance difference built in, up or down, across all income types.

johnwoodscra

You should enter the full $23,000 as your basis in Roth IRA conversions since that amount was rolled over from a qualified plan in 2021. The basis refers to the total amount of after-tax money converted into the Roth IRA, not just contributions or conversions made in 2023. Since you rolled over pre-tax funds and no taxes were paid at conversion, this amount is generally considered your basis in conversions and would be the non-taxable portion. Leave the 2023 contribution basis blank because you made no new contributions that year.