Help with 1099-R distribution code 1D - inherited account to Roth IRA question

This is an important distinction that trips up a lot of people. Based on what you've described, you did NOT do a rollover in the technical tax sense. What you did was: 1) Take a distribution from the inherited account (generating the 1099-R) 2) Separately make contributions to your Roth IRAs For it to be considered a rollover, the money would need to be transferred directly from one retirement account to another without you taking possession of the funds, or you would need to complete the rollover within 60 days of receiving the distribution. What you described is simply taking a taxable distribution and then making separate Roth contributions with some of that money. The two transactions aren't connected from a tax perspective. You'll need to report the 1099-R distribution as taxable (to the extent shown as taxable on the form) and separately track your Roth contributions. The code 1D typically indicates an inherited account distribution. This usually means there's no early withdrawal penalty, even if your wife was under 59½, but the taxable portion is still considered ordinary income.

I went through something weirdly similar last year and was going in circles with tax software. I finally ended up using https://taxr.ai which honestly saved me a ton of headache. You upload your 1099-R and it explains exactly how to handle inheritance distributions and what qualifies as a rollover. For your situation, it looks like you did a normal distribution (not a rollover) but the distribution code 1D means you shouldn't get hit with early withdrawal penalties since it's from an inherited account. I was able to fix my return and get everything sorted in about 20 minutes.

Just wanted to follow up about taxr.ai since I was skeptical earlier. I decided to try it with my inherited IRA distribution situation and wow - it actually worked incredibly well. I uploaded my 1099-R and it immediately flagged that I was about to incorrectly code my distribution as a rollover (which would have caused problems later). It gave me specific instructions for how to enter everything in TurboTax and explained exactly why code 1D meant I wouldn't face the 10% penalty even though I'm only 47. Honestly saved me from what would have been a major headache if the IRS questioned my return later.

After reading this thread, I need to mention something that's helped me tremendously with similar inheritance tax questions. I spent literally WEEKS trying to get through to someone at the IRS for clarification on my inherited IRA situation. Always busy signals or disconnects after waiting on hold for hours. I finally tried https://claimyr.com (there's a demo video at https://youtu.be/_kiP6q8DX5c) and they got me connected to an actual IRS agent in about 20 minutes. The agent walked me through exactly how to handle my 1099-R reporting and confirmed that the distribution code determined whether I'd face penalties. They also explained the documentation I needed to keep in case of audit questions later.

Coming back to say I was completely wrong about Claimyr. After my skeptical comment earlier, I got desperate enough to try it because I couldn't get any clear answers about how to handle my inherited IRA distribution. Got connected to an IRS rep in about 35 minutes who confirmed exactly what others in this thread have said - the distribution code 1D means no early withdrawal penalty, but I still owe regular income tax on the taxable portion. They also explained I needed to file Form 5329 with a specific exception code. Saved me from a potential audit headache and hours of more hold music. Sometimes you have to admit when you're wrong!

Just to add some clarity here - I'm a volunteer tax preparer and see this situation frequently. The code on your 1099-R is critical. Code 1D means "Death distribution, not subject to 10% penalty." This is standard for inherited accounts. For future reference, if you wanted to do an actual rollover of inherited retirement funds, there are very specific rules: - Spouses can roll inherited retirement accounts into their own retirement accounts - Non-spouse beneficiaries (like your wife inheriting from her uncle) generally cannot roll into their own accounts, but in some cases can transfer to an "inherited IRA" which has required distribution rules Since you took the distribution already, you'll need to report it as ordinary income (the taxable portion), but the good news is there should be no 10% early withdrawal penalty regardless of your age.

One thing nobody's mentioned yet - make sure your Roth contributions for those years were actually eligible based on your income. There are income limits for Roth IRA contributions, and if you went over the limit, you may have made excess contributions that need to be corrected. For 2023, the ability to contribute to a Roth starts phasing out at $138,000 for single filers and $218,000 for married filing jointly. Just something to double-check since you mentioned putting quite a bit into Roths.

Good to hear your income is well within the Roth limits! Based on everything discussed in this thread, it sounds like you have a clear path forward: 1) Report the full $14,300 taxable amount from your 1099-R as ordinary income 2) No early withdrawal penalty due to the 1D distribution code 3) Your Roth contributions are separate transactions and should be reported normally One small administrative note - when you're entering this in TurboTax, make sure you answer "No" to any question about whether this was rolled over to another retirement account. The software sometimes tries to be helpful but can create confusion with these inheritance situations. Also, keep good records showing the inheritance and the 1099-R in case you ever need to explain the source of funds to the IRS. Inheritance distributions can sometimes trigger additional scrutiny, especially when there are subsequent retirement contributions, but having the proper documentation makes everything straightforward. Sounds like you handled everything correctly from a planning perspective - just a matter of getting the tax reporting right now!

Just wanted to add one more consideration that might be helpful - since you mentioned using some of the inheritance for bathroom renovations, make sure you're keeping detailed records of how you allocated those funds. While it doesn't change the tax treatment of the 1099-R distribution, having clear documentation of what portion went to Roth contributions versus home improvements can be useful for your own records. Also, for future reference, if you ever inherit retirement accounts again, you might want to consult with a tax professional before making the distribution decision. Sometimes there are strategies like setting up an inherited IRA that can provide more flexibility in timing distributions to manage tax brackets over multiple years. In your case, taking the lump sum made sense given your plans, but it's worth knowing all the options. The main takeaway from this thread seems clear though - you'll report the $14,300 as ordinary income, no penalties due to the 1D code, and your Roth contributions are completely separate transactions. Sounds like you're on the right track!