1099-Q with Box 4b (QTP to Roth IRA transfer) checked

[v64checks]

I have a 1099-Q with Box 4b (QTP to Roth IRA transfer) checked, reflecting a SECURE Act 2.0 Section 126 529-to-Roth IRA rollover. TurboTax currently shows a 'Check This Entry' error saying the program hasn't updated to support this yet — can you provide an estimated timeline for when this will be resolved so I can file before the April 15 deadline?

[Hal_Al · Accepted solution]

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

Just don't enter the 1099-Q in TurboTax.  When the box 1 amount on form 1099-Q is fully covered by expenses, or ROLLED OVER to another qualified account (including a Roth IRA), TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records (the work sheet isn't going to tell you anything that will help with an IRS inquiry).  . 

But, you need to be sure that you meet all the new rules:

• $7000 yearly limit
• Beneficiary must have earned income that year of at least the amount transferred
• Your 529 savings account must be open for over 15 years before funds can be rolled over into a Roth IRA. 
• It must be a trustee to trustee rollover (the trustee to trustee rollover box will be checked on the 1099-Q)

• the Roth IRA must be in the beneficiary’s name

• 529 contributions made within the preceding five years cannot be rolled over.

• $35K lifetime maximum (2024 is the 1st year that the Roth rollover is allowed, so this isn't an issue yet)

[user17728430862]

This is incorrect.

Box 4a is not checked on form 1099-Q (Was this a trustee to trustee transfer?)

Box 4b is checked instead (Was this transfer from a QPT to a RothIRA?)

TT doesn't allow both boxes are checked.

[Hal_Al]

When you check both boxes, TT tells you that's not allowed and to pick the most appropriate one (4b in this case). 

[v64checks]

Thanks for your reply and solution. I have one anomaly here. Last year we did the rollover in two tranches, 1) one for $6500 that was applied to 2024 year and 2) $7000 to 2025 year. Soon after we realized that it was wrong to transfer that much amount as I didn't have enough earned income and I immediately asked Fidelity to move out these excess contributions. so for 2024 year I moved $4500 in excess contributions and for 2025 it was $6000. Now paid my tuition with that excess money. Do I need to report any of this to IRS and pay the 10% penalty on the 529 funds? the 1099-R said i didn't have to pay any taxes as I took out the money immediately. but since original source of the funds are the distribution from 529 plan I got two 1099-Qs for the above two amounts. I also have a 2024 5498 that shows I have contributed $7000 to my Roth IRA but I don't have that much balance in it since I took it out immediately. 
How do I enter all of this mess in TurboTax? and pay any additional taxes I may owe to IRS?

[Hal_Al]

That's somewhat a change in subject.  I suggest you start a new post to get more eyes on it.   You might want to post in the retirement section rather than the education section. 

@dmertz 

[dmertz]

I don't deal with Forms 1099-Q.  As I understand it from seeing the subject of this question having been posted many times, TurboTax does not yet support explicitly reporting this transaction.  Perhaps request a filing extension and hope that TurboTax adds the capability by October 15.  Until TurboTax is updated to support this transaction, about this only thing that one can do would be to enter the amount as an ordinary Roth IRA contribution on the beneficiary's tax return and to omit the Form 1099-Q.  It appears to me that this would produce the correct result on the tax return.

[v64checks]

Thank you, I will post to the Retirement section and see if I get any ideas there..

[WI_Filer]

Can someone from Turbotax please answer the question on when the software will be updated to fix this known error with the QTP to Roth transfer creating taxable income?  This thread (and similar) have been circulating with no explicit answer on a fix to the software - merely workarounds that don't work and problematic advice to delete the issued 1099-Q.

When will this be fixed? 

[MarilynG1]

Is the Roth contribution for you or for a beneficiary?  If for a beneficiary, you don't want to enter the rollover in your return, or it will be taxable.  The beneficiary can report the Roth contribution in their return (if they are required to file). 

However, since it is a non-taxable rollover, the IRS does not require reporting in a tax return.  Keep Form 5498 as documentation of the rollover.  Here's more info from IRS Pub. 970.

@WI_Filer 

[Hal_Al]

Q.  Can someone from TurboTax please answer the question on when the software will be updated to fix this known error with the QTP to Roth transfer creating taxable income?

A. No. I'm not sure they do know about it. The simple workaround: call it a rollover.

Q. Problematic advice to delete the issued 1099-Q?

A. There's no problem. The IRS days so, in multiple places. 

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 
4. IRS Pub 970, Rollovers and transfers: "Any amount distributed from a QTP isn’t taxable if it’s rolled over to:
   • A Roth IRA for the benefit of the same beneficiary, if
   the distribution is a direct trustee-to-trustee transfer
   from a QTP account that has been open for more than
   15 years and the amount distributed does not exceed
   total contributions (and attributable earnings) made to
   the QTP more than 5 years before the distribution
   date. However, this doesn’t apply to the extent the
   amount distributed when added to other amounts contributed to Roth IRAs exceeds the annual contribution limit."

[WI_Filer]

The Roth contribution is for the beneficiary of the account I own.  I am not reporting it on my return, but since he got the related 1099-Q with the 4b boxed checked for QTP to Roth IRA, he was planning on including it.  We expected Turbotax to treat as an untaxed distribution.  It doesn't.  It taxes the earnings from the contribution plus 10% penalty in error.

Based on the feedback, we're deleting this 1099-Q form, retaining the 5498 to prove the rollover status, and capturing the documentation from Turbotax employees telling us to delete the 1099-Q to avoid overpaying his taxes.

What's still not clear is why Turbotax isn't fixing this in their software.

Thanks!