Reporting qualified early distribution on Roth IRA

[MrFancypants]

I do not count on my Roth IRA as a part of my FIRE finances, and have been retired for a number of years now. Unfortunately my family has had a number of medical challenges over the last few years that drained out emergency fund and forced me to pull a small mount from my Roth.

What I know is that because these withdrawals qualify under the medical exception I won’t have to pay the 10% early withdrawal rate. The problem is I can’t seem to figure out what form that would be reported on.

I’d rather not pay someone to prepare my taxes but if I can’t figure this out I may have to.

Thanks in advance for any help you can offer.

[secondcor521]

It'll either be Form 8606 Part III (if your withdrawal amount was less than your contributions and/or seasoned conversions) or Form 5329 part I line 2 otherwise.

How old are you?  When did you open your first Roth account?

[MrFancypants]

It'll either be Form 8606 Part III (if your withdrawal amount was less than your contributions and/or seasoned conversions) or Form 5329 part I line 2 otherwise.

The withdrawal amount is significantly lower than the contribution amount, but if I have the option I’d still prefer to report it as medical.

Thank you very much for the forms I need to look at.

[secondcor521]

It'll either be Form 8606 Part III (if your withdrawal amount was less than your contributions and/or seasoned conversions) or Form 5329 part I line 2 otherwise.

The withdrawal amount is significantly lower than the contribution amount, but if I have the option I’d still prefer to report it as medical.

Thank you very much for the forms I need to look at.

The medical exemption seems to be code 5.  Note that this only exempts the amount which exceeds 7.5% of AGI from the 10% EWP (just like itemizing medical deductions on Schedule A).  This means you might pay more taxes doing it the way you prefer.

Other exception codes could apply depending on the situation.  Take a look at the Form 5329 instructions for line 2 and look at the list there.

I'm not sure if you have the option technically, but you could probably report it that way and the IRS would likely not catch it.

Reporting it via Form 8606 Part III would likely result in zero taxes or penalties.  It does require figuring out what your contribution basis is, which is just finding all your contributions (use your Form 5498s or contact your IRA custodian and ask them to help) and adding those up.  It would end up being about five lines on the 8606 (lines 19 through 23), and two of those lines are probably $0.

[ixtap]

Have you figured your 2023 AGI to confirm that you qualified unreimbursed medical bills were >7.5% of AGI?

Do you use software to file taxes?

[MrFancypants]

My total annual medical expenses are over 10% AGI, so I’m covered there. I learned that much before taking the early distribution.

[MrFancypants]

Have you figured your 2023 AGI to confirm that you qualified unreimbursed medical bills were >7.5% of AGI?

Do you use software to file taxes?

I have in the past but I prefer to do paper returns. I feel more confident that things are reported accurately that way.

[secondcor521]

My total annual medical expenses are over 10% AGI, so I’m covered there. I learned that much before taking the early distribution.

Do you understand that only the portion of your medical expenses in excess of 7.5% of AGI will be covered by the medical exemption to the early withdrawal penalty for the Roth distribution?

In other words, let's say your AGI was $100K and you withdrew $10K from the Roth and put it all towards medical expenses.  For the Form 5329 line 2 exception 5, you would calculate 7.5% of your $100K AGI, which would be $7500.  You'd then subtract $7500 from $10K to get $2500.  You'd end up with the following on Form 5329:

1  $10K
2.  $2500
3.  $7500
4.  $750

So you'd be paying $750 in EWP to avoid filling out a few lines on Form 8606.

In addition, I looked at the Form 5329 instructions, and it is pretty clear that you should fill out Form 8606 Part III first to see if the distribution even exceeds your contributions or conversions in the first place:

"Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25c of your 2022 Form 8606."

-- https://www.irs.gov/pub/irs-pdf/i5329.pdf

Based on your description, it sounds like you wouldn't even get to line 25c of Form 8606, so you shouldn't even be filling in Form 5329.

So you'd be doing things contrary to IRS instructions in order to probably pay more taxes.  I don't get it.

[secondcor521]

You might consider going to an AARP Foundation Tax Aide site.  They'll give you tax advice for free.  They'll even do your taxes for you for free.  You don't need to be a member of AARP to receive these services.

https://www.aarp.org/money/taxes/aarp_taxaide/

As an aside, doing returns on paper is more error prone.  It will also take you much longer to get a refund if you're getting a refund.

https://www.irs.gov/newsroom/common-and-costly-errors-taxpayers-should-avoid-when-preparing-a-tax-return

[MrFancypants]

My total annual medical expenses are over 10% AGI, so I’m covered there. I learned that much before taking the early distribution.

Do you understand that only the portion of your medical expenses in excess of 7.5% of AGI will be covered by the medical exemption to the early withdrawal penalty for the Roth distribution?

In other words, let's say your AGI was $100K and you withdrew $10K from the Roth and put it all towards medical expenses.  For the Form 5329 line 2 exception 5, you would calculate 7.5% of your $100K AGI, which would be $7500.  You'd then subtract $7500 from $10K to get $2500.  You'd end up with the following on Form 5329:

1  $10K
2.  $2500
3.  $7500
4.  $750

So you'd be paying $750 in EWP to avoid filling out a few lines on Form 8606.

In addition, I looked at the Form 5329 instructions, and it is pretty clear that you should fill out Form 8606 Part III first to see if the distribution even exceeds your contributions or conversions in the first place:

"Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25c of your 2022 Form 8606."

-- https://www.irs.gov/pub/irs-pdf/i5329.pdf

Based on your description, it sounds like you wouldn't even get to line 25c of Form 8606, so you shouldn't even be filling in Form 5329.

So you'd be doing things contrary to IRS instructions in order to probably pay more taxes.  I don't get it.

I think you’re right, I’ll run through the numbers. It looks like I misunderstood.


Fortunately it would only be a few hundred dollars worth of mistake, so a relatively cheap learning experience. I think it’d end up being $150 assuming that doesn’t disappear from the child tax credit I can’t take full advantage of.

[MrFancypants]

You might consider going to an AARP Foundation Tax Aide site.  They'll give you tax advice for free.  They'll even do your taxes for you for free.  You don't need to be a member of AARP to receive these services.

https://www.aarp.org/money/taxes/aarp_taxaide/

Oh thanks, I’ll have a close look at this.

[secondcor521]

My total annual medical expenses are over 10% AGI, so I’m covered there. I learned that much before taking the early distribution.

Do you understand that only the portion of your medical expenses in excess of 7.5% of AGI will be covered by the medical exemption to the early withdrawal penalty for the Roth distribution?

In other words, let's say your AGI was $100K and you withdrew $10K from the Roth and put it all towards medical expenses.  For the Form 5329 line 2 exception 5, you would calculate 7.5% of your $100K AGI, which would be $7500.  You'd then subtract $7500 from $10K to get $2500.  You'd end up with the following on Form 5329:

1  $10K
2.  $2500
3.  $7500
4.  $750

So you'd be paying $750 in EWP to avoid filling out a few lines on Form 8606.

In addition, I looked at the Form 5329 instructions, and it is pretty clear that you should fill out Form 8606 Part III first to see if the distribution even exceeds your contributions or conversions in the first place:

"Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25c of your 2022 Form 8606."

-- https://www.irs.gov/pub/irs-pdf/i5329.pdf

Based on your description, it sounds like you wouldn't even get to line 25c of Form 8606, so you shouldn't even be filling in Form 5329.

So you'd be doing things contrary to IRS instructions in order to probably pay more taxes.  I don't get it.

I think you’re right, I’ll run through the numbers. It looks like I misunderstood.


Fortunately it would only be a few hundred dollars worth of mistake, so a relatively cheap learning experience.

Again, if you start with line 19 on Form 8606, you'll probably owe $0 in taxes and $0 in penalties on your Roth distribution.

[MrFancypants]

My total annual medical expenses are over 10% AGI, so I’m covered there. I learned that much before taking the early distribution.

Do you understand that only the portion of your medical expenses in excess of 7.5% of AGI will be covered by the medical exemption to the early withdrawal penalty for the Roth distribution?

In other words, let's say your AGI was $100K and you withdrew $10K from the Roth and put it all towards medical expenses.  For the Form 5329 line 2 exception 5, you would calculate 7.5% of your $100K AGI, which would be $7500.  You'd then subtract $7500 from $10K to get $2500.  You'd end up with the following on Form 5329:

1  $10K
2.  $2500
3.  $7500
4.  $750

So you'd be paying $750 in EWP to avoid filling out a few lines on Form 8606.

In addition, I looked at the Form 5329 instructions, and it is pretty clear that you should fill out Form 8606 Part III first to see if the distribution even exceeds your contributions or conversions in the first place:

"Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25c of your 2022 Form 8606."

-- https://www.irs.gov/pub/irs-pdf/i5329.pdf

Based on your description, it sounds like you wouldn't even get to line 25c of Form 8606, so you shouldn't even be filling in Form 5329.

So you'd be doing things contrary to IRS instructions in order to probably pay more taxes.  I don't get it.

I think you’re right, I’ll run through the numbers. It looks like I misunderstood.


Fortunately it would only be a few hundred dollars worth of mistake, so a relatively cheap learning experience.

Again, if you start with line 19 on Form 8606, you'll probably owe $0 in taxes and $0 in penalties on your Roth distribution.

Ahhhhh, I’m sorry please forgive me for being a bit slow. Thanks for the guidance, I’ll refer back to it when I’ve got all my forms together.

[MrFancypants]

Instructions for line 22 on the 8606 turned on the lightbulb for me.  I get it now.

[secondcor521]

Instructions for line 22 on the 8606 turned on the lightbulb for me.  I get it now.

Yay!!

[MrFancypants]

Instructions for line 22 on the 8606 turned on the lightbulb for me.  I get it now.

Yay!!

Thanks again for your help, I’d spent an hour or two trying to figure this out and you sent me to the right place on the right forms. Greatly appreciated.

[secondcor521]

Instructions for line 22 on the 8606 turned on the lightbulb for me.  I get it now.

Yay!!

Thanks again for your help, I’d spent an hour or two trying to figure this out and you sent me to the right place on the right forms. Greatly appreciated.

You're very welcome.  Thanks for the kind words.