When you take a distribution from your Roth IRA, you'll receive a Form 1099-R that documents the withdrawal for tax purposes. In box 7 of Form 1099-R, your bank reports the distribution code that tells the Internal Revenue Service the type of withdrawal you took. If your withdrawal meets the criteria to be a qualified distribution, you'll see a "Q" in box 7.
The Q Code on Form 1099-R is used to denote whether or not the withdrawals you have made from your Roth IRA are considered qualified distributions.
Qualified Distribution Criteria
A Roth IRA withdrawal must meet two criteria to be a qualified withdrawal. One, you must be at least 59 1/2 years old, or suffering from a permanent disability, or using up to $10,000 to purchase a first home or are a beneficiary who inherited the account. Two, your Roth IRA must be open for five tax years. Tax years count the age of the account from Jan. 1 of the first tax year you made a contribution, rather than using the exact date you made the contribution, so don't worry about counting the exact days or months the account has been open.
Understanding Tax Consequences
When you take a qualified withdrawal from your Roth IRA, you won't owe any income taxes on the distribution. Roth IRAs offer after-tax savings, so you won't get a tax break for putting money into the account as you would with a traditional IRA. However, when you take a qualified distribution, as designated by the "Q" distribution code, even your Roth IRA's earnings come out tax-free.
Exploring Tax Reporting
Even though you get the money out tax-free, you still have to report it on your income taxes. You must use either Form 1040 or Form 1040A – Form 1040EZ doesn't have a line for itemized deductions. The total amount of your IRA distributions go on line 15a if you're using Form 1040 or line 11a if you're using Form 1040A. Unless you also have taxable IRA distributions, report zero on line 15b of Form 1040 or line 11b of Form 1040A.
Other Relevant Considerations
If you were expecting to see code "Q" because you meet all of the requirements, but see code "T" instead, don't lose hope. The instructions for Form 1099-R instruct the financial institution to use code "T" if it doesn't know that you meet the five-year holding period but does know that you otherwise qualify. Presuming you have in fact met the holding period requirement, you won't owe taxes on the withdrawal and can file as if you had seen code "Q."
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: Form 1040 Instructions
- Internal Revenue Service: Form 1040A Instructions
- Internal Revenue Service: Form 1099-R Instructions
- Charles Schwab: Roth IRA Withdrawals: The Exceptions Can Be as Important as the Rules
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."