Roth IRAs have several tax advantages over traditional IRAs. Contributions are made with post-tax dollars so there is no future tax liability to eat away at your savings. You can take qualified tax-free distributions from your Roth IRA and not report them as long as the distributions meet IRS regulations. Unqualified distributions may be subject to additional taxes and must be reported to the IRS.
Determine if you set up and contributed to your Roth IRA at least five years prior to the distribution date. If it has not been that long, the distribution is unqualified. If you meet the time requirement, answer the following four questions. Were you age 59 1/2 or older at the time of the distribution? Are you using the distribution to buy or rebuild your first home? Are you taking the distribution because you are disabled? If you are administrating an estate, was the distribution paid to the decedent's estate or to a named beneficiary? If you cannot answer yes to any of the four questions, the distribution is unqualified.
Find the total distribution amount on your Roth IRA Form 1099. Take IRS Form 8606 and fill in your name and Social Security number at the top. Go to Part III, Distributions from Roth IRAs. On line 19, enter the distribution amount as shown on your 1099. Enter qualified first-time homeowner expenses on line 20. Subtract line 20 from line 19 and enter that amount on line 21. If line 21 is zero or a negative number, skip lines 22 through 25. If not, complete lines 22 through 25. Subtract line 24 from line 23 to get the taxable amount of the distribution. If it is more than zero, report that amount on your 1040, line 15b.
Use Form 5329 to compute the additional taxes due on the distribution. Complete your personal information at the top of the form. Start with Part I, Additional Tax on Early Distributions. On line 1, enter the distribution amount from your 1099. On line 2, enter the amount of any distributions not subject to additional tax. Subtract line 2 from line 1 and enter the amount on line 3. Now take the amount on line 3 and multiply it by 10 percent to get the additional tax that is due. Enter the amount on line 4. Include this amount on your 1040, line 58.
Items you will need
- Roth IRA Form 1099
- IRS Form 8606 Non-Deductible IRAs
- IRS Form 5329 Additional Taxes on Qualified Plans
- File Forms 8606 and 5329 along with your federal income tax return.
- Consult a tax professional if you are not comfortable preparing your federal income tax return.
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