2003 Roth IRA Distributions – Changes to Codes for Form 1099-R by: Judy Tarpley, PenServ, Inc.
(903) 455-5135 email: [email protected]
Just when the aromas of Thanksgiving turkey and pumpkin pie were wafting through our kitchens, the IRS posted a new chart on its web site that contains reporting code changes for Roth IRA distributions – and the IRS wants these changes to be implemented for 2003 reporting!
Then, on December 2nd this chart was posted again with further clarifications for certain distributions described in this article. These changes substantially impact your system’s programming for issuing Form 1099-R with respect to reporting 2003 distributions from Roth IRAs. We have reproduced the chart as it was posted by the IRS on
December 2nd. We have also included a more detailed chart prepared by PenServ that is located on the last page of this article.
When the original chart was posted just before Thanksgiving, we contacted the IRS with several comments. As explained in more detail later, one of the changes stated that when using Code T, no other code can be used. In other words, Code T is now a standalone code.
In particular, we pointed out that if the Roth IRA owner had a return of excess plus earnings and was over age 59½, the use of Code T8 or TP was important. Using Code T8 or TP would indicate which year the earnings are taxable but that the 10% additional tax under §72(t) did not apply because of the exception for being age 59½. The IRS responded by stating that a return of excess would use Code J8 or JP, regardless of the Roth IRA owner’s age. It would then be the responsibility of the taxpayer to file Form 5329 and Form 8606 to determine the taxable amount and whether the 10% premature income tax applies. An IRS spokesperson explained to us that these changes were necessary because of the instructions to the taxpayer for Form 1040/1040A. These instructions tell taxpayers who receive Code T or Code Q on their Form 1099-R to enter -0- (zero) on the line for the taxable amount of the IRA distribution.
Subsequent to that conversation, on December 2nd, the IRS revised the chart of Roth IRA codes to clarify that Code T must be used by itself and that certain other distributions must use Code J, even if the Roth IRA owner is over age 59½.
We again contacted the IRS with concerns that it is too late in the year to expect major reprogramming for 2003. Their response was that if the revised Codes are not used for reporting 2003 Roth IRA distributions, the financial institution may need to issue corrective reporting based upon these Code changes. Therefore, it is imperative that you determine how to implement these changes immediately.
In order to provide a comprehensive article with respect to reporting Roth IRA distributions and that also describes the recent changes on the proper Code or Codes, the following discussion covers all boxes on IRS Form 1099-R that affect Roth IRAs.
Box-by-Box Analysis
Form 1099-R for Roth IRA Distributions Box 1 – Gross Distribution:
Report the total amount of the distribution including income taxes that were withheld (if any), but do not include any administrative-type fees that were charged, such as CD penalties for early withdrawal. For a distribution of property other than cash, report the fair market value of the property on the date of distribution.
Recharacterizations:
Recharacterizations of eligible IRA contributions are reportable on Form 1099-R. Enter the amount of the
recharacterized contribution plus earnings in this box. In the case of a loss on the recharacterized contribution, enter the actual amount recharacterized in this box. Recharacterizations must be accomplished via a trustee-to-trustee transfer, rather than a distribution and rollover.
The IRA from which the recharacterized amount is being transferred is referred to as the "FIRST IRA". Therefore, that trustee must issue Form 1099-R. (The trustee of the FIRST IRA must also report the original contribution and its character on Form 5498 issued with respect to the FIRST IRA.)
If the FIRST IRA is a traditional IRA, the only type of contribution that is eligible to be recharacterized to a Roth IRA is a regular contribution. If the FIRST IRA is a Roth IRA, the eligible recharacterized contribution to a traditional IRA can be either a regular contribution or a conversion. Earnings (or losses) attributable to the
recharacterized contribution must be included in the transfer. “Prior year” recharacterizations must be reported on a separate Form 1099-R from “same year” recharacterizations because different reporting codes apply for Box 7. A “prior year” recharacterization is a recharacterization of a contribution made for 2002 and recharacterized in 2003, even if the 2002 contribution was made in 2003. In the case of a recharacterization of a conversion that came from a traditional IRA in 2002 but was not converted until 2003 (but within the requisite 60 day period), treat this recharacterization as a “prior year” recharacterization for these reporting purposes. A “same year”
recharacterization is a recharacterization of a contribution made for 2003 and recharacterized in 2003. Revocations:
If a regular contribution is made to a Roth IRA that is revoked within the plan’s first 7 days, and distribution is made to the taxpayer, enter the gross distribution in this box. If an IRA conversion contribution is made to Roth IRA that is revoked within the plan’s first 7 days, and distribution is made to the taxpayer, enter the gross distribution in this box.
If a rollover or transfer is made from one Roth IRA to another Roth IRA that is revoked within the plan's first 7 days, and distribution is made to the taxpayer, enter the gross distribution in this box.
Box 2a – Taxable Amount:
This Box 2a is generally left blank for all Roth IRA distributions with a few exceptions.
1. If a regular Roth IRA contribution or a conversion is recharacterized to a traditional IRA, enter 0 (zero) in this box.
2. If an excess (or unwanted) contribution made to a Roth IRA is distributed (including the earnings
attributable) by the deadline for filing the individual's Federal income tax return (including extensions) for the year during which the contribution was made, enter only the earnings in this box. If there are no earnings, enter 0 (zero) in this box.
3. If a regular contribution made to a Roth IRA is timely revoked (usually within the first 7 days from the date the plan is established), and no earnings are distributed, enter 0 (zero) in this box. If earnings are
distributed in such revoked distribution, enter only the earnings in this box.
4. If a conversion made to a Roth IRA is timely revoked, and no earnings are distributed, enter 0 (zero) in this box. If earnings are distributed in such revoked distribution, enter only the earnings in this box.
5. If a rollover or transfer made from one Roth IRA to another Roth IRA is timely revoked, report in this box the same amount entered in Box 1.
Box 2b – Taxable Amount Not Determined
Generally, mark this box and leave Box 2a blank (unless the distribution is a return of excess plus earnings, a recharacterization, or a revocation as explained in Box 2a).
Do not mark this box if the distribution is a return of an excess contribution plus earnings from a Roth IRA. In this case, the earnings are taxable (and reported in Box 2a), and thus the taxable amount is determined. Do not mark this box if the Form 1099-R is reporting a recharacterization transfer from a Roth IRA to traditional IRA. In this case, 0 (zero) is entered in Box 2a, and thus the taxable amount is determined to be zero. Do not mark this box if the distribution is a revocation of a Roth IRA. In this case, either the earnings or 0 (zero) will be entered in Box 2a, and thus the taxable amount is determined.
Box 2b – Total Distribution
Enter an "X" in this box only if the payment shown in Box 1 is a total distribution. A total distribution is one or more distributions within 1 tax year in which the entire balance of the account is distributed. If periodic or installment payments are made, mark this box in the year the final payment is made.
Box 3 – Does not apply to Roth IRAs Box 4 – Federal Income Tax Withheld
Most Roth IRA distributions are exempt from any Federal income tax withholding as a result of the Consolidated Appropriations Act of 2000 (PL 106-554). Therefore, do not withhold on any Roth IRA distribution, except in the case of a returned contribution plus earnings under §408(d)(4) or a revoked contribution plus earnings.
These earnings are always treated as a taxable distribution, even where the Roth IRA owner otherwise meets the definition of a “qualified distribution” (see IRC §408A(d)(2)(C) and final regulation §1.408A-6, Q&A 1(d)). Thus, withholding applies only on the earnings being distributed. Of course, the recipient can elect no withholding on the earnings.
Box 5 – Does not apply to Roth IRAs Box 6 – Does not apply to Roth IRAs Box 7 – Distribution Codes
For Roth IRA distributions, the Distribution Codes have recently changed effective for 2003 reporting. As a practical matter, Code J has become the “default code” to use on most Roth IRA distributions. Code T and Code Q are now standalone codes. The only time Codes T or Q are used are in the following situations:
Code T – If you do not know if the 5-year holding period has been met, but the participant has reached age 59½, died or is disabled.
Code Q – If you know that the 5-year holding period has been met, AND the participant has reached age 59½, died, or is disabled.
Please refer to the “Chart of Roth IRA Codes” prepared by PenServ.
Box 8 – Does not apply to Roth IRAs. Box 9a – Does not apply to Roth IRAs. Box 9b – Does not apply to Roth IRAs. Boxes 10-15 – State and Local Tax Withheld
These boxes and Copies 1 and 2 of Form 1099-R are provided for convenience only and need not be completed for the IRS. If you use these boxes, the state and local information boxes can report distributions and taxes for two states or localities separated by the dotted line.
General Reminders:
Direct transfers between Roth IRAs are not reported as distributions. Also, a transfer pursuant to a divorce or legal separation from a Roth IRA to a Roth IRA established for the benefit of the gaining spouse is not reported as a distribution from the losing spouse’s Roth IRA.
Recipients will be required to attach Form 1099-R to their Federal income tax returns only if Federal income tax withholding is shown in Box 4.
NEW CHART AS POSTED BY THE IRS ON DECEMBER 2, 2003
Change to 2003 Instructions for Form 1099-R and 5498 – Guide to Distribution Codes (Box 7)
The Explanations for Codes J, Q and T shown in the Guide to Distribution
Codes for Roth IRA distributions has changed. If you have issued a Form 1099-R (or applicable substitute) for 2003 for a Roth IRA distribution, you may have to issue a corrected return based on the changes in the chart below.
*Used with
Distribution Codes Explanations code. . . (if
applicable) J – Early distribution Use Code J for a distribution from a 5, 8, or P from a Roth IRA Roth IRA when Code Q and Code T
do not apply.
Q – Qualified Use Code Q for a distribution from a None Distribution from a Roth IRA if you know that the participant
Roth IRA meets the 5-year holding period and: • The participant has reached age 59½, or • The participant died, or
• The participant is disabled.
Note: If any other codes, such as 5, 8, or P apply, use Code J.
T – Roth IRA Use Code T for a distribution from a None distribution, Roth IRA if you do not know if the
exception applies 5-year holding period has been met but: • The participant has reached age 59½, or • The participant died, or
• The participant is disabled.
Note: If any other codes, such as 5, 8, or P Apply, use Code J.
See the Caution for the Box 7 instructions on page R-8.
Also, for Codes 5, 8 and P, delete any reference to Codes T and/or Q that is shown in the “Used with code. . .(if applicable)” column.
The above changes will appear in the 2004 Instructions for Forms 1099-R and 5498.
PENSERV’S CHART OF ROTH IRA CODES
Code or Codes
Meets 5-yr. Holding Does not meet 5-yr. Holding
Under 59 ½ Over 59 ½ Under 59 ½ Over 59 ½
Reason For Distribution Under 59 ½
No Specific Reason
J Not Applicable J Not Applicable
Over 59 ½
No Specific Reason Not Applicable Q Not Applicable T
Death Q Q T T
Disability Q Q T T
Substantially Equal Payments
J(See Note 1) J (See Note 1 and
Note 3) J
(See Note 1) J (See Note 1 and Note 3)
Medical J(See Note 1) Not Applicable
(See Note 4) J
(See Note 1) Not Applicable (See Note 4)
Insurance Premiums
For Unemployed J
(See Note 1) Not Applicable
(See Note 4) J
(See Note 1) Not Applicable (See Note 4)
1st Time Home Buyers J (See Note 2) Not Applicable
(See Note 4) J
(See Note 1) Not Applicable (See Note 4)
Higher Education J(See Note 1) Not Applicable
(See Note 4) J
(See Note 1) Not Applicable (See Note 4)
IRS Levy J(See Note 1) Not Applicable
(See Note 4) J
(See Note 1) Not Applicable (See Note 4)
Use following Reason Codes Regardless of Age of Participant Excess plus earnings
taxed prior year
JP JP (See Note 1) JP JP (See Note 1)
Excess plus earnings taxed current year
J8 J8 (See Note 1) J8 J8 (See Note 1)
Prior year
Recharacterization
R R R R
Same year
Recharacterization N N N N
Prohibited Transactions J5 J5 (See Note 1) J5 J5 (See Note 1)
REVOCATIONS: Regular Contribution with earnings
J J8 (See Note 1) J J8 (See Note 1)
Regular Contribution
without earnings J8 J8 J8 J8
Rollover from another Roth IRA
J J (See Note 1) J J (See Note 1)
Transfer from another
Roth IRA J J
(See Note 1) J J (See Note 1)
Conversion without earnings
J J J J
Conversion with earnings
J J8 (See Note 1) J J8 (See Note 1)
(Note 1) - Taxpayer must file Form 5329 to show that the taxable amount of the distribution (if any) is not subject to the 10% additional tax under §72(t). Form 8606 may also need to be filed.
(Note 2) - Taxpayer must file Form 5329 to show that the distribution is a "qualified distribution" and that none of the distribution is taxable. Form 8606 may also need to be filed.
(Note 3) - After the modification period has expired, use Code T or Q whichever applies. (Note 4) - After 59½, the reason for distribution is 59½, use Code T or Q whichever applies.
