qbteachmt
Level 15

They should remember when they left that employer and moved the money. It would be in the statement, too, and there would be tax form(s) from that event, as well, and even the broker should be able to answer the question. Even their own tax filing might show something for the event.

There is withholding? That seems like the issuer knows there will be taxes owed. Typically, a Roth distribution would not be taxable, so there is no withholding. Are they sure they meet any/all of the 5-year rules?

No one remembers how much they contributed, which would be found on W2 and paystubs when done through an employer (then their Tax Transcript for that year would include the W2 info), or converted and paid taxes on (which would be on a Tax Transcript and Return, as well), they need to find as much info as possible. For instance, there might have been both 401(k) (employer match) to their own Roth 401(k) amount (post-taxed) and when you leave that employer, the 401(k) would roll to Trad IRA and the Roth 401(k) would roll to Roth. It seems a shame they might be reporting as taxable the money they already put in post-tax.

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

And if they are not at least 59 1/2, then Earnings will include the penalty, even if everything else qualifies for non-taxable and no penalty.

You have a lot of moving parts, my friend. You have to hold the taxpayer responsible for getting most of this info, or giving you authorization to do that. You are going to need an extension for the 1040.

Good luck.

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