Early Distributions from Roth IRA

[majorcpa]

I am uncertain whether my client qualifies for the ROTH IRA Early Distribution Exemption.

Client is 56.  Mother is still alive and well.  Mother created a Roth IRA for daughter over 10 years ago.  Client/daughter took early withdrawal and closed out the Inherited Roth IRA.  Client/daughter was unemployed for 2022 and is reporting the liquidation of the ROTH IRA as the only item on her tax return.

It is my understanding that there should be a 10% penalty for early withdrawal of a ROTH IRA.  Lacerte is not showing any penalty nor any of the requisite forms.  

[qbteachmt]

"Mother created a Roth IRA for daughter over 10 years ago."

It's a common incentive for a parent to help the working child open an Roth and even fund it, as an incentive match to a child learning about the working world.

"Client/daughter took early withdrawal and closed out the Inherited Roth IRA."

What inherited IRA is this? So far, you did not describe anything inherited.

"Client/daughter was unemployed for 2022 and is reporting the liquidation of the ROTH IRA as the only item on her tax return."

Okay.

"It is my understanding that there should be a 10% penalty for early withdrawal of a ROTH IRA. Lacerte is not showing any penalty nor any of the requisite forms."

Did you mark something as inherited? Is this daughter a dependent on the mother's form? What do you have from the 1099-R? Is the total return lower than basis? Were there earnings? Were there any contributions within the prior 5 years? Have you read all the regulations that would apply, to see where the taxpayer (daughter? mother?) is or is not eligible for this distribution?

[majorcpa]

Perhaps I misspoke with "inherited".  Her mother set it up for her.  Life of ROTH exceeds 10 years.  Mom set it up for her daughter, 56.  The 1099-R does not provide basis and neither mom nor daughter Know about the basis other than what was put in originally.  They say not much have been added via earnings.  Yes, most annoying.  I have coded J-early withdrawal.  It is a total distribution.   In other information, checked total distribution. Coded 1 for early distribution tax for Form 5329.   The result of all this is a refund for the 10% penalty.

[sjrcpa]

Basis=what was put in originally, plus any other contributions, less any earlier distributions.

[qbteachmt]

Inherited means someone died and someone else is the beneficiary and inherits the account. Inherited accounts have different provisions than when it is your own. Her mother opening it for her is a courtesy; not meaningful otherwise.

"The 1099-R does not provide basis and neither mom nor daughter Know about the basis other than what was put in originally."

That's no excuse. Any account statement will show new contributions and other withdrawals/distributions, as well as earnings.1099-R in prior years shows distributions. Form 5498 for any year with activity (contributions and distributions) will show the details, as well. If she doesn't have paper records, and can't log in to get them electronically, then she makes a request to the broker and agent holding that account. I've gotten 15 1099's for/with one person, this year, by doing this. Since 2011, brokerages maintain all basis in investments.

There are Three Roth 5-year rules:

https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp

It's not just penalty. Doing this wrong can result in paying tax on her own already-taxed basis funds.

[majorcpa]

That web site was very informative.  Thanks.