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If IRS requirements are not met, earnings withdrawn will be included in income and taxed. Taxpayers under the age of 59-1/2 will also be subject to a 10% penalty on earnings withdrawn unless they meet qualified exceptions.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.
Use Form 8606 to determine Taxable Distributions (withdrawals). To enter information about Roth IRA distributions:
- Nondeductible IRAs - For a MFJ return, select Taxpayer or Spouse
- Distributions from Roth IRAs
- Enter total amount of Roth IRA Distributions
- Enter Basis in all Roth IRAs
Note: This is a guide on entering Roth distributions into the TaxSlayer Pro program. This is not intended as tax advice.