When you take a distribution from any qualified retirement, including Roth IRAs, your financial institution sends you a Form 1099-R that documents the withdrawal for tax purposes. Understanding how the distribution gets reported, as well as how it affects your taxes, helps you make wiser decisions about your Roth IRA distributions.
When you take a distribution from your Roth IRA, your Form 1099-R shows you how much you took out and how much, if any, is taxable. The total amount of the distribution appears in Box 1 and the taxable portion appears in Box 2a. If the financial institution withheld any money from your distribution for federal taxes, that amount appears in Box 4. If your distribution is tax-free, your financial institution does not withhold money from the withdrawal.
When Are Roth IRA Distributions Tax-Free?
Roth IRA distributions that meet the requirements for a qualified distribution come out tax-free. Qualified distributions occur when the account has been open for at least five years and you are at least 59 1/2 years old. Your distribution also is tax-free if you withdraw contributions--but not earnings--at any time. In this case, your Form 1099-R will show $0 for the taxable amount of the withdrawal. However, you still need to report the nontaxable amount on your income tax return.
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When Are Roth Distributions Taxable?
If you take out earnings from your Roth IRA before you satisfy the criteria for a qualified distribution, the earnings will be reported as a taxable distribution. For example, if you take a $9,000 nonqualified distribution and you only have $5,000 in contributions in your Roth IRA, $9,000 would be listed as the total distribution in Box 1, and $4,000 would be listed as a taxable distribution in Box 2. You might also have money withheld from the distribution for federal taxes, which would be listed in Box 4.
Early Withdrawal Penalties
If you take a nonqualified Roth IRA distribution, the Form 1099-R does not list your early withdrawal penalty. You must figure this penalty separately using Form 5329. Typically, the penalty is 10 percent of the taxable portion of the withdrawal, but the penalty may be waived if the money is used for certain purporses, such as high medical bills, college tuition or a first-time home purchase. If an exception applies, report it on Form 5329.