Form 8606 is a multi-purpose form for reporting IRA transactions, specifically,
- Nondeductible contributions made to traditional IRAs;
- Distributions from traditional, SEP, or SIMPLE IRAs, if the taxpayer has basis in these IRAs;
- Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs; and
- Distributions from Roth IRAs.
When is a Roth IRA Distribution taxable?
Current legislation requires that a Roth IRA be in place for a full 5 years prior to any withdrawal. Distributions from a Roth IRA that include earnings may be taxable if the taxpayer is under the age of 59-1/2 or has not met the 5-year rule.
If IRS requirements are not met, earnings withdrawn will be included in income and taxed. Taxpayers under the age of 59-1/2 will also be subject to a 10% penalty on earnings withdrawn unless they meet qualified exceptions.
Taxpayers who have met the 59-1/2 age requirement will be subject to income tax on earnings of early withdrawals (due to not meeting the 5-year rule), but will not be subject to the 10% early withdrawal penalty.
You will use Form 8606 to determine the amount of the taxable distributions but exclude these kinds of distributions:
- a rollover (other than a repayment of a qualified disaster distribution as shown on Form 8915-F
a qualified charitable distribution
- a one-time distribution to fund an HSA
- a recharacterization
- a return of certain contributions (see the instructions for more info)
To enter information about Roth IRA distributions, from the Main Menu of the tax return (Form 1040) select:
- Nondeductible IRAs - For a MFJ return, select Taxpayer or Spouse
- Distributions from Roth IRAs - See the Form 8606 instructions for each of these menu lines to determine what to enter and what to exclude.
- Total Roth IRA distributions in 20xx (form line 19)
- Qualified First-Time Homebuyer Distribution (form line 20)
- Basis in Roth IRA Contributions (form line 22)
- Basis in Roth Conversions (form line 24)
Note: This is a brief guide on entering Roth distributions into the TaxSlayer Pro program. This is not intended as tax advice.