Backdoor Roth bungled and may need to file amended return?

[Paul28]

I completed a backdoor Roth IRA for $5500 before April 15, 2019 in a trust company.  I completed the necessary paperwork and it was not a taxable event.  However, i changed jobs in January 2019 and I rolled over a traditional 401K.  I told the trust company that I wanted to do a backdoor Roth for it as well and I thought that all was well.  I filed for an extension on my taxes and submitted them before the October 15th deadline.  I ended up receiving a refund.  I didn't expect a refund - I expected a hefty tax bill to pay the taxes on my 401K.  Upon inquiry, it turns out that the trust company rolled the 401K in March 2019 directly over to a Roth IRA without first depositing it into a traditional IRA account.  They insinuated that it was my fault for not having completed a second form for the 401K amount to first be deposited into a traditional IRA.  I asked them if it was even possible to directly rollover a traditional 401K to a Roth IRA without going through a traditional IRA account first?  They didn't seem to respond to this question.  Is this direct rollover possible?  Have I lost the Roth deferred tax status forever?  Can I complete a revised return and correct this?  The trust company says they will send me a 1099 R form for the 401K rollover after January 1st, 2020 but I must complete a Roth conversion form first.  I have since transferred all funds to a different trust company that I preferred and it is held in a Roth IRA account there. 

[macuser_22]

You seem to be confusing two different things.

A "backdoor Roth" is making a non-deductible contribution to a Traditional IRA and then converting that to a Roth IRA so that the non-deductible contribution offsets the tax on the conversion.  That only works if you has no traditional IRA account whatsoever before the contribution and ended up with no Traditional IRA account after the conversion.

Rolling and converting a 401(k) to a Roth IRA has noting to do with a backdoor Roth.  Yes, if you specify that the 401(k) is to be converted to a Roth IRA then it can be done directly without first going into a Traditional IRA account.  The 1099-R for a direct conversion should have a code G in box 7 and box 1 and 2a both with the amount converted so that the entire amount will be taxable.

If you also make a non-deductible Traditional IRA contribution and converted that to a Roth (backdoor Roth) then you will receive a separate 1099-R for that Traditional IRA distribution.

[dmertz · Accepted solution]

" I asked them if it was even possible to directly rollover a traditional 401K to a Roth IRA without going through a traditional IRA account first?"

Yes, ever since a combination of law changes in 2008 and 2010, any regular distribution from a traditional 401(k) account is permitted to be deposited into a Roth IRA by taxable rollover and does not affect the status of your Roth IRA.  If done by direct rollover where the distribution from the 401(k) is made payable directly to the Roth IRA for your benefit, not payable to you personally, the 2019 Form 1099-R will have code G in box 7, will have the taxable amount in box 2a and the taxable amount will be added to your taxable income for 2019.  If the Form 1099-R has code G in box 7 but shows the taxable amount as zero you'll need to contact the 401(k) plan to obtain a corrected Form 1099-R showing the correct taxable amount.  If the deposit into the Roth IRA was instead done by 60-day rollover where the check was made payable to you personally the Form 1099-R will have code 1, 2 or 7 in box 7 and it will be up to you to specify in TurboTax the amount rolled over to the Roth IRA.  Such a taxable Roth rollover is not permitted to be undone, so you are subject to whatever increase in your 2019 taxable income this produces.

I don't see why the trust company would be asking you for any Roth conversion form.  A Roth conversion form would only be applicable to a distribution from a traditional IRA and the only distribution you made from a traditional IRA was the one where you converted the $5,500 originally contributed to the traditional IRA and you would have already completed the Roth conversion form for that.  The only form that the trust company should have required with regard to your rollover from the 401(k) is the deposit form where you would have specified the type of account to which the rollover would be deposited; I don't see how the trust company would permit this deposit without you completing this form unless, perhaps, the check from the 401(k) was made out directly to a particular account, in this case to your Roth IRA account.

The rollover from the 401(k) in March 2019 has no bearing on your 2018 tax return.

If your Roth conversion from the traditional IRA was done in 2019, this Roth conversion should not have been reported on your 2018 tax return but is reportable on your 2019 tax return even though the nondeductible traditional IRA contribution was made for 2018.

[Paul28]

Thanks for the reply.  However, I had a question. I posted the same question to the TaxMama forum since I didn't know which forum might reply.  They seemed to think the 401k funds should count as income on my 2018 return and need a revised return.  I did it as a 60 day rollover because it was going to be faster from the 401k company and sent it immediately to the trust company. You also referred to the 1099 sent from the trust company but they did not send one for the 401k rollover and said that they would only issue one in 2020 because the funds went into the Roth IRA in 2019 even though it did so before the April 15th deadline. I pointed out that the funds went in before 4/15 but they insisted that they wouldn't issue a 1099 until 2020.

TaxMama wrote:

"So, there is nothing wrong with rolling your standard 401K funds to a
Roth IRA. You don't need to put it into an IRA first.
That's OK.  But, since all the money in the account was pre-tax, the entire rollover
is taxable.

Which means that you will have to amend the 2018 return to report that income.
Include a copy of the statement showing the amount was rolled into a Roth IRA.
And include a copy of the 1099R which didn't show the code for a taxable rollover.
You should not have any penalties. But you should have interest on the
balance due.

Can you ask your previous trust company to pay the interest?
No.

You got their 1099-R by March or earlier.
You were able to log into your accounts with them every day, all year
to see what was going on.
You had until October 15th to sort this out.  And if you had asked us (or any tax pro), we would have told you to include the rollover as taxable income - and you would not have had
that huge refund - and you wouldn't have to amend now.

Sorry, I wish I had better news for you.

Now, about that 1099-R they are going to issue this year.
Tell them not to issue anything at all for 2020.
It will just complicate issues."

[dmertz · Accepted solution]

"They seemed to think the 401k funds should count as income on my 2018 return and need a revised return."

It appears that TaxMama thought that the distribution from the 401(k) occurred in 2018 rather than in 2019 and that early in 2019 you received a 2018 Form 1099-R with code G in box 7 and $0 in box 2a.  However, it's clear that the distribution you are asking about here occurred in 2019.  As the trust company indicated, the Form 1099-R for this distribution from the 401(k) will be a 2019 Form 1099-R that you will receive near the end of January 2020 because the distribution occurred in 2019, and is reportable on your 2019 tax return.  What you did with this money after it was distributed from the 401(k) has no effect on which year's tax return must show the distribution.  Unless you made a distribution from the 401(k) in 2018, there is no 401(k) distribution to report on your 2018 tax return.

The "April 15th" deadline is for regular contributions to an IRA.  The April 15 deadline has nothing to do with rollovers.  If you made a regular contribution to a traditional IRA for 2018 but did not report it on your 2018 tax return, you need to amend your 2018 tax return to include it, but this has nothing to do with your 401(k) distribution.

I have no idea what payment of "interest" TaxMama is referring to.  Nothing about this distribution and rollover involves any interest.