1099-R code J

[bekzm]

Client has 1099-R Code J received after being in the Roth plan since 2014 age 39. Not 59 1/2. I taxed him on the 10% and he was told he can take out the Roth and not be subject to the 10% penalty. Is he subject to 10% or not since he took a distribution of only the $2000 and still has $1000 at the end of 2019.

[Lion]

He can take out his contributions at anytime. They were already taxed funds. No penalty. However, if he takes out earnings, he could have a 10% penalty on the earnings. Was it all a contribution back in 2014 or did he have any recent conversions to his Roth?

[bekzm]

It is his money that he started in 2014 and not any earnings but according to a flow chart that is at the IRS publication 590-B Chapter 2 the flow chart shows - yes a 10% penalty. I have 3 this year with J code and did not do the 5329 for the 10% penalty and now this last one I put the 10% and redid the other 2. What am I reading wrong? Penalty or No Penalty

[Lion]

Did you fill out Form 8606? Or, Form 5329 with an appropriate exception? From your small numbers ($2,000 withdrawn out of $3,000 total) it sounds like he took some of his original contributions only and no earnings. Is that what happened? Is that the story the tax return is telling? Follow the flow.

[kathyc2]

If the 2K distribution was the same or less than the amount he contributed, no tax or penalty. The chart you are looking at is for qualified distributions, or in other words the earnings.

[bekzm]

No other codes. He said it has been 5years and he only took out the contributions. But the flow chart from 590-B publication shows should calculate a penalty.

[Lion]

Is this the flow chart result you meant: "The distribution from the Roth IRA isn’t a qualified distribution. The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax." But your client took out his own contributions and did NOT take out his earnings. Read the whole chapter on Roth IRAs: "Are Distributions Taxable? You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."

[RWG1950]

TTB (PP 13-12) lists the ordering rules for Roth IRA distributions. As the customer was under the age of 59 1/2 & no exception appears to apply, his distribution (as explained) would be a non-qualified one - regardless of the number of years he has held the Roth IRA. Assuming all principal in the Roth had resulted from regular contributions (not conversions - which have their own ordering rules), any such principal would be construed to have been withdrawn first & should be tax free. Only when he withdraws earnings in such a distribution, would they be taxed and subject to the 10% penalty.
To a Roth IRA investor, the words tax-free often dominate - to the exclusion of the other factors that may be involved.

[Toobusy]

Are you sure it was a Code J? Code J is not taxable, it stands for Rollovers or Disability Income (I can't remember which) but I know it is not taxable!

[Gene V]

Are you sure it was a Code J? Code J is not taxable, it stands for Rollovers or Disability Income (I can't remember which) but I know it is not taxable!

Toobusy, you need to get some rest------Code J Early distribution from ROTH IRA

[sami]

Roth IRA early withdrawal before 591/2, 10% penalty is only on the amount above original contribution (meaning above original basis) and tax is also on the same amount.

[bekzm]

Thank you everyone - problem solved.