Received 1099-R with code J after withdrawing from Roth IRA - how to handle taxes?

The distribution code J on your 1099-R indicates an early distribution from a Roth IRA where the 10% additional tax exception applies. The tax treatment depends on whether this is a qualified distribution or not. Since you mentioned you just contributed last year, this is likely a non-qualified distribution. For Roth IRAs, withdrawals follow a specific order: first contributions (tax-free), then conversions, and finally earnings. Your original contributions come out tax-free and penalty-free, even in early withdrawals. Only the earnings portion ($245 in your case) would be subject to income tax and potentially the 10% early withdrawal penalty. When filing your taxes, you'll need to complete Form 8606 (Nondeductible IRAs) Part III to calculate the taxable portion of your distribution. This form will help you properly identify your basis (contributions) versus earnings, ensuring you're only taxed on the earnings portion.

I had this EXACT same problem last year! Seriously, I was freaking out because TurboTax wanted to tax my entire Roth withdrawal. I ended up using https://taxr.ai after spending hours trying to figure it out on my own. Their AI analyzed my 1099-R and other tax docs and immediately identified that I needed to complete Form 8606 to separate my contributions from the earnings. It walked me through exactly what numbers to enter in the tax software. Saved me from overpaying like $2k in taxes I didn't actually owe! The tool also explained that code J means the 10% penalty exception applies, but I still needed to pay regular income tax on just the earnings portion. Might be worth checking out if you're stuck.

Just wanted to update after trying taxr.ai that profile 12 recommended. It was actually super helpful! I was skeptical at first about sharing my documents, but I ended up just manually entering the information from my 1099-R. The system immediately identified that I was dealing with a non-qualified Roth distribution and explained that my basis (contributions) come out first tax-free. It gave me step-by-step instructions for TurboTax to make sure Form 8606 was completed correctly. Once I did that, my taxable amount dropped from the full distribution to just the earnings portion. Saved me almost $800 in unnecessary taxes! Definitely worth checking out if you're running into this issue.

If you're still struggling with this, you might want to try calling the IRS directly to get clarification. I know it's a pain to get through to them during tax season, but I've had success using https://claimyr.com to get connected faster. Check out their demo at https://youtu.be/_kiP6q8DX5c I had a similar issue with distribution codes on a retirement account withdrawal last year and spent days getting nowhere. Claimyr got me through to an IRS agent in about 30 minutes instead of the usual 2+ hour wait. The agent was able to explain exactly how to report my distribution correctly in my tax software. Saved me a ton of stress!

I have to admit I was wrong about Claimyr. After getting disconnected FOUR times trying to reach the IRS myself about a similar distribution code issue, I gave in and tried the service. Got connected to an IRS agent in about 40 minutes without having to sit by my phone the whole time. The agent confirmed exactly what others here were saying - for Roth distributions, you need to complete Form 8606 to properly identify the taxable portion. She walked me through how to adjust this in my tax software. For what it's worth, the agent also mentioned this is one of the most common mistakes people make with Roth distributions - assuming the whole amount is taxable. Glad I didn't file with that error!

Make sure to check if you qualify for any exceptions to the early withdrawal penalty too. The J code means an exception applies, but you'll need to verify which one. If you used the money for qualified higher education expenses, first-time home purchase (up to $10k), or had certain medical expenses, you might avoid the 10% penalty on the earnings portion.

Does anyone know if the 5-year rule applies here? I thought Roth earnings were only tax-free if the account was open for 5 years?

This is a really common confusion with Roth IRA distributions! Your instinct is absolutely correct - you should NOT be taxed on your entire $6,745 distribution. The key issue is that your tax software needs to know your contribution basis to properly calculate the taxable portion. Here's what you need to do: Make sure Form 8606 (Part III) is completed in your tax software. This form tells the IRS that you have a basis of $6,500 in contributions that have already been taxed. Only the $245 in earnings should be subject to income tax. Most tax software has a section specifically for IRA distributions where you can enter your contribution basis. Look for something like "Roth IRA basis" or "nondeductible contributions." Once you input that $6,500 figure, your taxable amount should drop to just the earnings portion. The distribution code J indicates you qualify for an exception to the 10% early withdrawal penalty (likely due to your medical expenses exceeding 7.5% of AGI based on your other comment), but you'll still owe regular income tax on the earnings. Don't let the software scare you into thinking you owe tax on money you already paid tax on!

Great to see so many helpful responses here! Just wanted to add one more perspective as someone who went through this exact scenario a few years ago. One thing to double-check is that your Roth IRA custodian (bank/brokerage) correctly reported your contribution basis to the IRS. Sometimes there can be discrepancies between what you actually contributed and what they have on record, especially if you made contributions across multiple tax years or had any rollovers. You can verify this by checking your prior year tax returns where you would have reported the Roth contribution, or by contacting your IRA custodian directly. They should have records showing your total contribution basis. If there's a mismatch, you'll want to correct it before filing to avoid any issues down the road. Also, keep good records of this transaction! The IRS treats each Roth IRA distribution as coming from your oldest contributions first (FIFO - first in, first out), so maintaining accurate records of your contribution basis will be important for any future withdrawals. Form 8606 creates an official paper trail of your basis that protects you from being double-taxed later.

Just to add another important point that I don't see mentioned yet - make sure you understand the ordering rules for Roth IRA distributions going forward. Since you withdrew your entire balance, this is straightforward, but for future reference: Roth distributions always come out in this order: (1) regular contributions, (2) conversion contributions, then (3) earnings. This means if you contribute to a Roth again in the future, any withdrawals will first tap your new contributions (tax and penalty-free), then any previous conversion amounts, and only then touch earnings. The IRS tracks this across ALL your Roth IRAs combined, not per individual account. Also worth noting - since you had a medical emergency that qualified for the penalty exception, you might want to consider building up an emergency fund before contributing to retirement accounts again. While it's great that Roth contributions can be accessed penalty-free, you ideally want to leave retirement money alone to grow long-term. Having 3-6 months of expenses in a regular savings account can help avoid needing to tap retirement funds for future emergencies. The tax treatment you're dealing with is correct though - just the $245 in earnings should be taxable income, with no 10% penalty due to your medical expenses exceeding the 7.5% AGI threshold.

I went through this exact same situation a couple years ago and it was incredibly stressful until I figured out the right approach. The good news is you're absolutely correct - you should NOT be paying taxes on your entire $6,745 distribution. Here's what worked for me: In your tax software, look specifically for the IRA distribution section and make sure it's asking about your "basis" or "nondeductible contributions." You need to tell the software that you have $6,500 in contribution basis that's already been taxed. This is crucial because the software has no way of knowing this from just the 1099-R alone. Once you input that basis amount, the software should automatically calculate that only your earnings ($245) are subject to regular income tax. The distribution code J means you qualify for an exception to the 10% early withdrawal penalty - likely due to medical expenses based on what you mentioned. Don't skip Form 8606 Part III even if your tax software tries to - this form is what officially documents your basis and protects you from being double-taxed on future distributions. I learned this the hard way when I almost filed without it. One last tip: double-check with your IRA custodian that they have the correct contribution records on file. Sometimes there can be reporting discrepancies that cause headaches later. Better to catch any issues now before you file!

This thread has been incredibly helpful! I'm a tax preparer and see this exact confusion every single tax season. You're absolutely right to question why you'd owe taxes on the entire distribution - that would indeed be double taxation on your contributions. The key point everyone has correctly identified is Form 8606 Part III. This form is essential because it establishes your "basis" in the Roth IRA (the $6,500 you contributed with after-tax dollars). Without this form, the IRS has no way of knowing that portion was already taxed. A few additional considerations for your specific situation: 1. Since you mentioned this was for medical expenses, make sure your tax software applies the penalty exception correctly. The code J confirms an exception applies, but you want to verify it's calculating no 10% penalty on the $245 earnings portion. 2. Keep detailed records of this transaction. The IRS uses a "first-in, first-out" rule for Roth distributions, so this withdrawal reduces your contribution basis for any future distributions. 3. If you recontribute to a Roth IRA in the future, remember that you'll need to rebuild that contribution basis before any future withdrawals would be completely tax-free. The bottom line: only the $245 in earnings should be taxable income, with no penalty due to your medical expense exception. Don't let the software intimidate you into paying tax on money you've already been taxed on!