Early Roth Distribution

[Rainman1966]

My client had a Roth IRA withdrawal in the amount of $24000 that was all earnings.  He was under the impression that he could withdraw the amount tax free the year he turned 59 instead of 59 1/2.  He did the withdrawal one month before turning 59 1/2.  He received a 1099-R from Fidelity with a code J.  I reviewed part 1 of the form 5329 but do not think any of the 1 thru 12 exceptions apply.  Has anyone had any luck in getting the 10% penalty waived. 

[qbteachmt]

Your taxpayer doesn't control this.

A google search reveals Roth Ordering Rules: The IRS has prescribed a distribution hierarchy for Roth IRA assets. Contributions are always taken first; conversions (if any) are second in order by year of contribution, with converted pre-tax assets taken first and converted after-tax assets taken second. Earnings are considered distributed last.

Example:

https://www.investopedia.com/terms/o/orderingrules.asp

Assets are distributed from a Roth IRA in the following order:

1. IRA participant contributions
2. Taxable conversions
3. Non-taxable conversions
4. Earnings

...

There are also rules regarding specific assets. For example, contributions are distributed tax-free and penalty-free, and converted pre-tax assets are distributed without being taxed or penalized, providing that they have been held in the account for five years or more.

If the pre-tax assets have not been held in the account for at least five years, then a 10% fee would apply to the distribution. Converted after-tax assets, however, are always distributed tax-free and penalty-free.

Further earnings are distributed tax-free and penalty-free if the Roth IRA has existed for five years and the distribution is done on or after age 59 ½, or following death, disability, or a first-time home purchase.

[Just-Lisa-Now-]

Do you have his ROTH basis entered in the program at all? I think theres a quickzoom button on the 1099R worksheet somewhere to take you to that area.

[Rainman1966]

He has no basis as he withdrew all of his contributions in prior years.  If he would have waited 30 days in order to meet the 59 1/2 rule he would have had no taxable income from the withdrawal.  Now he has a taxable Roth distribution plus the 10% penalty.  I was hoping that someone might have encountered this problem and knew of a way to get the penalty waved.  Probably an impossibility.

[qbteachmt · Accepted solution]

While there were ways to salvage this for 2020, there is not much to do for 2021. Too bad so many people do not get better guidance from their broker/agents, much less ask the tax preparer if this is a good idea before acting on it.

[Rainman1966]

I agree.  What makes matters worse is that it was his investment advisor that told him it was ok in the year he turned 59 1/2.  No future responses needed from the group.  As always thank you for your input.