roth distribution

[oceanlovin'ea]

I have a new client who also brought me an IRS letter "Notice of Deficiency" regarding 2008 tax return.

They have a 1099R that they did not report. It is coded J according to the letter. That is a Roth distribution. The IRS is adding the Roth distribution to income. A roth IRA is not deductible so it shouldn't be included in income should it?

What am I missing here?

I know there is a penalty for early withdrawal except in their case they had an exceptionally large amount of medical bills that far exceed the distribution so an exception to the penalty would also apply and they wouldn't owe anything.

Linda, EA

[Gretel]

I have a new client who also brought me an IRS letter "Notice of Deficiency" regarding 2008 tax return.

They have a 1099R that they did not report. It is coded J according to the letter. That is a Roth distribution. The IRS is adding the Roth distribution to income. A roth IRA is not deductible so it shouldn't be included in income should it?

What am I missing here?

Linda, EA

Maybe it was a conversion? There are special rules for conversions, but this is as much as I know of top of my head.
Or distribution was higher than contributions and 5 year period wasn't up yet?

[RitaB]

Great timing on the letter, huh?

Contributions to ROTH are not taxable or subject to penalty when withdrawn. Ever. Contributions are withdrawn first, too. It's a beautiful thing.

However, IRS does not know what portion of the withdrawal is contributions. Similar to the 1099-B, and IRS doesn't know what your basis was.

It will have to be explained to them, I believe it's Form 8606 Part III.

If he withdrew earnings, the exceptions to the penalty are covered on Form 5329.

[Gretel]

Contributions to ROTH are not taxable or subject to penalty when withdrawn. Ever.

Almost, with the exception of conversations. Now I looked it up. If all they put in Roth came from conversions and the five years are not up yet, neither to they qualify for the exception of early withdrawal penalty, then distributions are tax free - if all the tax has been paid upon conversion, but these distributions are still subject to penalty.,

[RitaB]

Hmm.

Well, I did not know that. Obviously. Thanks for the heads up. And not whipping me with a wet noodle in the process.

[Gretel]

. And not whipping me with a wet noodle in the process.

Even though you almost asked for it. It's always dangerous to say ever, never or always.

[oceanlovin'ea]

Was not a conversion ever. TP put money in the Roth account monthly. Initially set up in 2004. Distribution was in 2008.

The Roth account was with investment firm and the fund was losing money instead of making money.
Took money out for medical bills above 7.5% AGI.

He is calling now to get definite figures on contributions and if any earnings included in distribution.

Thanks for your help. This is why people should not just pay the IRS when they get a letter that says they owe money.

Linda, EA

[RitaB]

We kill me

[QUOTE=Gretel;120605It's always dangerous to say ever, never or always.[/QUOTE]

Was not a conversion ever.

Forever and ever. Amen.