529 to Roth IRA rollover taxability indication

[RichInPitt]

According the IRS Publication 970, a QTP distribution isn't taxable if it's rolled over to:

- Another QTP for the benefit of the same beneficiary...

- An ABLE account for the benefit of the same beneficiary...

- 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 .... (Added via the SECURE 2.0 ACT)

I'm entering a 1099-Q for a distribution that was rolled over to a Roth IRA meeting all of the requirements.  But when going through the questionnaire, TT asks:

"Was all or part of this distribution of $7,000 rolled over to another qualified tuition program or ABLE account within 60 days?

Answering the question correctly, as it was not, because a ROTH isn't listed, the full amount is taxed.  Seems clear to me TT hasn't updated the software to include "or ROTH IRA ...", so I'm planning on just answering Yes, even though it's not. 

Anyone else run into this?  Thoughts/comments?

[maglib]

@RichInPitt 

If you received a 1099-Q indicating a trustee-to trustee rollover, save it for your records.  You're not required to enter the 1099-Q into any tax return if you met the rules.

• The 529 plan must be open for at least 15 years.
• The lifetime limit for the rollover is $35,000 per beneficiary.
• The Roth IRA must be in the name of the beneficiary of the 529 plan.
• Any contributions made within the past five years (and earnings on those contributions) are ineligible to be moved into the Roth IRA.
• The annual limit on the rollover is the IRA contribution limit for the year, less any other IRA contributions.
  • For example, the current IRA contribution limit is $6,500. If the beneficiary made any IRA contributions, the rollover amount must be reduced by those contributions. Therefore, if the beneficiary contributed $2,000 to any IRA, the amount available for rollover is $4,500.
  • Consequently, getting to the $35,000 lifetime limit may take more than five years.
• The rollover must be a plan-to-plan or trustee-to-trustee rollover. This means you cannot take a check from the 529 plan to deposit into the IRA.
• The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.

The beneficiary must have earned income, and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit. Therefore, if the beneficiary is not working, no rollover is available because there is no earned income."

[RichInPitt]

I realize that 970 say "Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren't taxable distributions".  But that's because I dove into and weeded through the 79 page Pub 970.

If I went through the process of entering the form, counting on TT to correctly do my taxes, and answered this correctly, as presented, I have Additional Schedule 1 Line 8z Other income as well as Schedule 2 Line 8 Additional Tax added to my return. That's $1,000 in excess tax.

Does Turbo Tax expect users to know that their instructions are wrong, and either answer the question incorrectly or unilaterally decide that the distribution is not taxable, despite the software thinking that it is?  I don't think users should be depending on to read IRS guidelines and max tax decision that the software doesn't support.

[maglib]

@RichInPitt  I don't work for TT, just trying to help. I am sorry this happened. 

 TT did a bunch of updates on these and has a number of posts.  I honestly would think that users whom knew about the Roth conversion would know it was not taxable.  

You should have also received a Form 5498 (to document the contribution to the Roth IRA)

You also receive a 1099Q for any 529 withdrawals that was not reportable if you had qualified education expenses.  Although TT walks you through these, it is not reported anywhere.

Part of the problem is the IRS whom still has not finalized draft rules on 1099Q which means no tax software can finalize nor program completely till they do.  latest draft https://www.irs.gov/pub/irs-dft/i1099q--dft.pdf

[Hal_Al]

Q. Does Turbo Tax expect users to know that their instructions are wrong, and either answer the question incorrectly or unilaterally decide that the distribution is not taxable, despite the software thinking that it is? 

A. Yes.

It actually does not get reported.  So far, the IRS has not come up with a way to report it like (for example) how you report an IRA rollover.  Like wise, TurboTax has not come up with a way to enter it. They are aware of the problem and are working on it for next year. 

In the mean time, I believe this statement still applies:

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).  You'll need to check the "trustee to  trustee  rollover" box at the 1099-Q screen. 

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." 

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

The alternative, for those who insist it has to be entered, is to answer yes at the did you rollover screen, even though Roth is not there. 

Another discussion thread:

https://ttlc.intuit.com/community/taxes/discussion/re-1099q-on-529-rollover-to-roth-are-gains-taxed-...