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I have a client that withdrew money from a regular IRA where…

I have a client that...
I have a client that withdrew money from a regular IRA where by the 1099 indicates a 1 in Box 7. She also withdrew monies from a Roth IRA which she should have not funded due to her income limits. The broker took some of her brokerage money an opened a Roth for the client for the past 2 years, The brokerage firm caught the error and issues a 1099 with J in box 7. The brokerage firm then took the money and put it back into their account.Is there a penalty on either one of them?
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Answered in 2 minutes by:
3/1/2018
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 17,657
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello, I'm Robin. Welcome to JustAnswer. I'm reviewing your question now and typing up my reply. I'll post that in just a few moments.

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They both are reporting an early distribution. Early distributions do have a 10% penalty applied unless there is an exception.

You can check for exceptions that may apply. Many are able to use the medical cost exception.

Here is a list of all

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

If an exception is found then form 5329 is used to report it and no penalty.

Please let me know if you need more information.
If not then please scroll up to see the STARS to rate so I am credited.

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Customer reply replied 1 month ago
Both accounts were funded in error 2 years ago. The brokerage house caught it and issued these 1099's . The regular IRA was never deducted on any return. The Roth should have a 6% penalty and the regular should have no tax and no penalty, The issue is that the 1099's dont indicate that.

If the Trad was never deducted then a form 8606 would be required to show the BASIS in the IRA (already taxed portion).

The ROTH excise tax could be avoided by requesting that and the form 5329.

The 1099R do not indicate so the additional forms are filed to reflect the situation.

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Customer reply replied 1 month ago
File form 8606 for both IRA'sShould a note be attached to the return?

You will need a statement that simply explains the error and point the finger exactly to the administrator so no penalty for the excise tax.

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Customer reply replied 1 month ago
What form shall I attach for a statementSo no penalties for either IRA withdrawal which incidentally was not ok'd by the client.

You will need the 5329 but a typed statement is all. There is no special form.

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Customer reply replied 1 month ago
thank you so much

You are most welcome

A positive 5 star rating is appreciated so I am credited for assisting.

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 17,657
Experience: 15years with H & R Block. Divisional leader, Instructor
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Customer reply replied 22 days ago
Robin no penalties and no taxes as well?
Both the TRAD and ROTH IRA were never received by the client. It was the broker that had discretion in the account and set these up.I just want to be clear that there is no penalty nor Tax?
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