How to report an IRA distribution for child birth under SECURE Act

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
assyadh
Posts: 153
Joined: Tue Sep 18, 2018 12:44 pm

How to report an IRA distribution for child birth under SECURE Act

Post by assyadh » Thu Mar 26, 2020 1:13 pm

Hi everyone.

As you may know, the SECURE Act introduced the possibility to get a 5k distribution from retirement accounts, penalty free.

I am trying to figure out how that would be reported at tax time, to ensure we're not slapped with the 10% penalty.

The 2020 instructions from the 1099-R [1] mention that the distribution code that must be used is 1 which is "Early distribution, no known exception.".

I am wondering how reporting the code 1 would NOT trigger the 10% penalty. I tried a blank IRA distribution and Schwab mentions that they will use distribution code 1.

Any idea?

Thanks!


[1] https://www.irs.gov/pub/irs-dft/i1099r--dft.pdf

Alan S.
Posts: 9345
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: How to report an IRA distribution for child birth under SECURE Act

Post by Alan S. » Thu Mar 26, 2020 3:02 pm

assyadh wrote:
Thu Mar 26, 2020 1:13 pm
Hi everyone.

As you may know, the SECURE Act introduced the possibility to get a 5k distribution from retirement accounts, penalty free.

I am trying to figure out how that would be reported at tax time, to ensure we're not slapped with the 10% penalty.

The 2020 instructions from the 1099-R [1] mention that the distribution code that must be used is 1 which is "Early distribution, no known exception.".

I am wondering how reporting the code 1 would NOT trigger the 10% penalty. I tried a blank IRA distribution and Schwab mentions that they will use distribution code 1.

Any idea?

Thanks!


[1] https://www.irs.gov/pub/irs-dft/i1099r--dft.pdf
Custodians will still code as 1 and you will attach Form 5329 to override the penalty by showing an exception code for line 2 of the 5329. The 2020 5329 Inst. will likely show a new exception code for this assigned by the IRS. In the event that this isn't done you could use dump code 12 (Other exceptions) on the 5329.

More on this Secure Act provision from the Kitces blog:
New Exception To The 10% Early Withdrawal Penalty For Childbirth And Adoption

Section 113 of the SECURE Act introduces a new exception to the 10% early distribution penalty to the mix. More specifically, the exception allows up to $5,000 to be distributed penalty-free from an IRA or from a plan as a “Qualified Birth or Adoption Distribution”.
To meet the requirements of a Qualified Birth or Adoption Distribution, an individual must take a distribution from their retirement account at any point during the one-year period beginning on either the date of birth, or the date on which the adoption of an individual under the age of 18 is finalized.
Given this limitation, a Qualified Birth or Adoption Distribution will only be able to provide financial assistance once the qualifying event has occurred (i.e., account owners can’t take such a distribution to pay for initial adoption expenses prior to the date the adoption is finalized). On the other hand, the rules only stipulate that the distribution must occur after the qualifying event, which means an individual could still take a Qualified Birth or Adoption Distribution after the event to help replace the cash previously spent. In fact, the rules don’t even require that the distribution directly tie to qualifying expenses at all, merely that the distribution occurs after a qualifying event.

In addition, the $5,000 limit is a limit “with respect to any birth or adoption…”, and as such, appears to ‘replenish’ itself with each new birth or adoption (i.e., the $5,000 is a per-child limit). Furthermore, the exception applies on an individual basis. Therefore, if both of a child’s parents have available retirement assets, each can make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born/adopted.
Finally, in the event a parent who took a Qualified Birth or Adoption Distribution is later able to “repay” such amount, they may do so back to the plan from which the distribution was made, or to an IRA. In other words, to the extent prior Qualified Birth or Adoption Distribution(s) have been made, those individuals will have the opportunity to make an additional contribution – over and above the standard contribution limits – to ‘repay’ themselves. Though notably, interested individuals may wish to wait for what will likely be future Treasury Regulations that explain the exact timing rules for such ‘re-contributions’.

Topic Author
assyadh
Posts: 153
Joined: Tue Sep 18, 2018 12:44 pm

Re: How to report an IRA distribution for child birth under SECURE Act

Post by assyadh » Thu Mar 26, 2020 5:58 pm

Thanks!

I just tried with TurboTax and they do not support this exception code yet, only the 'catch all' one. This will probably be handled for next year.

Thanks a lot.

Post Reply