How to report?

[Art]

Client got 1099-R box 7 Code J For $33,000 indicating penalty applies. He has had Roth since 2008 and is age 48. Amount contributed + earnings is $31,000 so only $2000 should be taxable and subject to 10% penalty. Correct? Should I put $31,000 in box 5 and let it go at that or include an attachment to explain this?

[Rapid Robert]

Form 8606, Part III.

But what do you mean, "contributed + earnings is $31K". What is the additional $2K, if not earnings or contributions? In any case, only his contributions (including conversions after five years) can be withdrawn without penalty, the remainder (ALL the earnings) goes into taxable income and is also penalized using Form 5329.

And how did you come up with using Box 5? Did you even read the instructions printed with the form 1099-R received?

[ATSMAN]

If you are using any professional tax prep software it should have a worksheet for Roth distributions. Generally the way these work is you enter the 1099-R data including box 7 code and then on that screen there should be a checkbox for Roth distributions that takes you to a worksheet where you enter the basis, when the Roth was established, earnings, contributions etc. The way it is suppose to work is that distribution up to basis after 5 years can be distributed tax free. Income attributable to the distribution is taxable and also the pre-mature distribution penalty applies to the income if taxpayer is less than 59.5.

[Rapid Robert]

The way it is suppose to work is that distribution up to basis after 5 years can be distributed tax free..

There is no five year period for distribution of contribution basis -- contributions can be distributed at any time tax free. Conversion basis does have a five year waiting period for tax free treatment.