You are correct, you do not have a taxable event.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including a roll over to another plan, to cover the distribution. When the box 1 amount on form 1099-Q is fully covered (and it is in your case), TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.
References:
- 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."
- 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”.
Just delete the 1099-Q and not have to deal with the complicated 1099-Q interview.
