Based on the SECURE Act of 2019, individuals can now remove funds from an IRA penalty-free to pay for qualified birth and adoption expenses. The IRS has posted a draft version of the 2020 Instructions for Forms 1099-R and 5498, which appears to provide some insight into how the IRS intends for IRA providers to report qualified birth and adoption distributions as well as the repayments of those distributions to IRAs. While these instructions are only draft form and may change before their final release, what is published in draft form appears to be a good indication of the IRS’ expected interpretation on the matter. The draft instructions include the following:
- For IRA owners under the age 59½, Qualified Birth and Adoption Distributions withdrawn from Traditional IRAs are to be reported with a Code 1 (Early distribution, no known exception) in Box 7 of Form 1099-R. For IRA owners under the age of 59½, Qualified Birth and Adoption Distributions withdrawn from Roth IRAs are to be reported with a Code J (Early distribution from a Roth IRA) in Box 7 of Form 1099-R. With IRA providers reporting with a Codes 1 and J, it will be the IRA owners who are responsible for claiming the penalty exception for a Qualified Birth or Adoption on his taxes.
- A repayment of a Qualified Birth or Adoption Distribution is to be reported in Box 2 of IRS Form 5498 as a rollover contribution for the year in which the repayment is received.