SECURE Act Update: Qualified Birth or Adoption IRA Transaction Reporting
ComplianceTax & AccountingMarch 03, 2020

SECURE Act update: Qualified birth or adoption IRA transaction reporting

Overview

The Setting Every Community Up for Retirement Enhancement Act of 2019 (i.e. the SECURE Act) was passed on December 20, 2019 and includes a provision that allows qualified birth or adoption distributions from an individual retirement account (IRA), presumably to pay for the related expenses. These distributions, limited to $5,000 per individual per birth or adoption, will be exempt from the 10 percent penalty tax for early distribution (i.e., prior to age 59½) from an IRA. Additionally, such distribution(s) can be repaid to an IRA. The Internal Revenue Service (IRS) explains in its 2020 Instructions for Forms 1099-R and 5498 how these transactions are to be reported.

Reporting distributions

Distributions from IRAs are reported on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Report a distribution for a qualified birth or adoption distribution as follows:

Box 1: Enter the gross distribution amount taken from an IRA during a calendar year.

Box 2: For distributions from a traditional IRA enter the same amount as shown in Box 1. For distributions from a Roth IRA this box is generally left blank.

Box 7: For a traditional IRA enter Code 1, early distribution, no known exception. It is not an IRA custodian’s or trustee’s responsibility to determine if a distribution is used to pay for birth or adoption expenses. An IRA owner is responsible for filing IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to claim exemption from the 10 percent penalty tax.

IRS Form 1099-R

Reporting repayments

Contributions to IRAs are reported on IRS Form 5498, IRA Contribution Information. Report the repayment of a qualified birth or adoption distribution as follows:

Box 14a – Repayments: Enter the amount of any repayment of a qualified birth and adoption distribution.

Box 14b – Code: Enter “BA” for the repayment of a qualified birth or adoption distribution.

IRS Form 5329

Conclusion

An IRA custodian or trustee will want to contact its data processing company to determine when they will update their data system to accommodate distributions and repayments of qualified birth and adoption distribution transactions. Wolters Kluwer continues to analyze the SECURE Act’s impact on forms, brochures, training materials, and reference materials. We also expect to receive additional information and guidance from the IRS in forthcoming weeks and possibly months.

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Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.