How to report BDA Roth IRA MRD? Maybe miscoded 1099-R


R

Rich Carreiro

My wife's father died in June 2007 at age 62. At the time of his death
he had a Roth IRA with American Funds. He had had the Roth for over
five years at that point.

My wife filed the requisite beneficiary claim with American and they
set up a Beneficiary Designated Account (BDA) for her. Once that was
done she opened a BDA at Fidelity (which is where she wanted the money
to ultimately end up) and transferred it over.

In 2008 she took her first MRD (she decided to take it over her whole
lifetime instead of all within five years).

We've received the 1099-R from Fidelity reporting this. The code in
Box 7 is T ("Roth distribution, exception applies") and the IRA box is
checked. (Shouldn't that be a Q? Of course, Fidelity never asked for
any account aging information so they have no way to know my
father-in-law had the Roth for over five years when he died).
From my reading of Pub 590 this is a qualified distribution -- it's
made persuant to the original owner's death and he had the account for
over five years when he died. However, the tax software (UTS's
TaxWise) is inserting an 8606 into the return, insisting the
distribution is non-qualified, and adding it to income.

So how do I report this as a qualified distribution and make it drop
out of income? That's a three-part question:
(1) How would I report this if I were doing the return on paper?
(2) Any happen to know how to properly report this in TaxWise?
(3) Or do we have to argue at Fidelity and try to convince them
to reissue the 1099-R with a Q instead of a T?
 
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P

Phil Marti

T is correct as the owner died. Enter the 1099-R in Taxwise. In TAxwise
on page 2 of the 8606, just enter the cost basis (the amount of the
distribution) on line 22. The taxable amount will disappear and the red
exclamation mark next to page 2 of the 8606 in the tree, will change to a
blue checkmark.
The problem with this approach is that the 8606 is wrong. I think we all
agree that this is a qualified Roth distribution regardless of the code on
the 1099-R. You do not include any qualified distribution other than the
1st time homebuyer type on the 8606. (See the 8606 instructions.) Zeroing
out the tax effect using line 22 does get rid of the 1040 line 15 problem,
but it results in an incorrect 8606 being sent to IRS.

I'd change the code on the 1099-R input to "Q". That results in a correct
1040 line 15 and a correct (or absent) 8606. If the IRS is curious about the
1099 from Fidelity, which I doubt, they'll inquire.It won't be the first
time they've seen one with an incorrect code.

E-file: I don't know if TaxWise sends a 1099-R without withholding as part
of the record, but if it does and you're worried about altering it, just
file on paper, where no copy of the 1099-R is required. After all, what
you're attesting to is what you're filing, not the contortions you went
through to get the software to produce it.
 
R

Rich Carreiro

Alan said:
T is correct as the owner died. Enter the 1099-R in Taxwise. In
TAxwise on page 2 of the 8606, just enter the cost basis (the amount
of the distribution) on line 22. The taxable amount will disappear and
the red exclamation mark next to page 2 of the 8606 in the tree, will
change to a blue checkmark.
Yeah, that would work. Of course we'd have no basis to claim that
basis :) since we don't know what the basis in the Roth IRA really was
(though it shouldn't matter because the 5-year period was met before
he died). How would this be done on a paper return? Would you still
do the contribution basis trick? And consider the hypo where only
$100 of contribution were ever made but the account was worth $10,000.
You'd have to falsely claim there was more than $100 of basis.

Surely there's an official procedure for what you need to do when the
distributions are qualified because the death was after the 5-year
holding period was satisfied?
 
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A

Alan

Phil said:
The problem with this approach is that the 8606 is wrong. I think we all
agree that this is a qualified Roth distribution regardless of the code on
the 1099-R. You do not include any qualified distribution other than the
1st time homebuyer type on the 8606. (See the 8606 instructions.) Zeroing
out the tax effect using line 22 does get rid of the 1040 line 15 problem,
but it results in an incorrect 8606 being sent to IRS.

I'd change the code on the 1099-R input to "Q". That results in a correct
1040 line 15 and a correct (or absent) 8606. If the IRS is curious about the
1099 from Fidelity, which I doubt, they'll inquire.It won't be the first
time they've seen one with an incorrect code.

E-file: I don't know if TaxWise sends a 1099-R without withholding as part
of the record, but if it does and you're worried about altering it, just
file on paper, where no copy of the 1099-R is required. After all, what
you're attesting to is what you're filing, not the contortions you went
through to get the software to produce it.
If the Roth had remained with the original trustee, you would
have seen a Q. As it came from Fidelity, they will code it a T.
There is nothing inherently wrong with a T. In addition, I beg to
differ that the 8606 is "wrong." One of things I learned is to
complete schedules and forms that are consistent with the coding
on the IRS information form one receives. Fidelity doesn't know
whether the distribution is qualified or not. Therefore, to be
consistent with the code T and let the IRS know that the
distribution is not taxable, you just enter your cost basis. As
the cost basis by definition is equal to the balance in the
account, the entry is correct. If the taxpayer does not want to
have to deal with this each year, they need to contact Fidelity
and provide whatever documentation Fidelity needs to verify that
the account meets the rules for qualified distributions.
 

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