Early Distributions from Roth IRA

Forum|Forum|3 years ago
February 25, 2023
1 reply
14 views

I am uncertain whether my client qualifies for the ROTH IRA Early Distribution Exemption.

Client is 56. Mother is still alive and well. Mother created a Roth IRA for daughter over 10 years ago. Client/daughter took early withdrawal and closed out the Inherited Roth IRA. Client/daughter was unemployed for 2022 and is reporting the liquidation of the ROTH IRA as the only item on her tax return.

It is my understanding that there should be a 10% penalty for early withdrawal of a ROTH IRA. Lacerte is not showing any penalty nor any of the requisite forms.

Lacerte Tax

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qbteachmt

Level 15

"Mother created a Roth IRA for daughter over 10 years ago."

It's a common incentive for a parent to help the working child open an Roth and even fund it, as an incentive match to a child learning about the working world.

"Client/daughter took early withdrawal and closed out the Inherited Roth IRA."

What inherited IRA is this? So far, you did not describe anything inherited.

"Client/daughter was unemployed for 2022 and is reporting the liquidation of the ROTH IRA as the only item on her tax return."

Okay.

"It is my understanding that there should be a 10% penalty for early withdrawal of a ROTH IRA. Lacerte is not showing any penalty nor any of the requisite forms."

Did you mark something as inherited? Is this daughter a dependent on the mother's form? What do you have from the 1099-R? Is the total return lower than basis? Were there earnings? Were there any contributions within the prior 5 years? Have you read all the regulations that would apply, to see where the taxpayer (daughter? mother?) is or is not eligible for this distribution?

Don't yell at us; we're volunteers

M

majorcpaAuthor

Level 2

Perhaps I misspoke with "inherited". Her mother set it up for her. Life of ROTH exceeds 10 years. Mom set it up for her daughter, 56. The 1099-R does not provide basis and neither mom nor daughter Know about the basis other than what was put in originally. They say not much have been added via earnings. Yes, most annoying. I have coded J-early withdrawal. It is a total distribution. In other information, checked total distribution. Coded 1 for early distribution tax for Form 5329. The result of all this is a refund for the 10% penalty.

sjrcpa

Level 15

Basis=what was put in originally, plus any other contributions, less any earlier distributions.

The more I know the more I don’t know.

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