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Retirement tax questions
So each year that you take out a distribution or do a partial Roth conversion of an IRA, the basis will be reduced by the portion that you calculated is nontaxable? Thus line 14 from the previous year becomes line 2 of the next year? And Turbotax automatically will prefill line 2?
All correct.
Husband also has a solo 401(k) plan. Does it require any entries in Form 8606?
Form 8606 only applies to IRA contributions and distributions. It has nothing to do with anything that happens with a 401(k) other than the fact that you need to do an adjustment on line 2 for any basis rolled over from a qualified retirement plan like a 401(k), which you have discovered. There is no similar form for qualified retirement plans since the calculation of the nontaxable portion is done by the plan administrator, not the participant.
In general how hard is it to file an amended return with Turbotax, can it be e-filed and is acceptance as quick as it is with the original filing? You mention attaching an explanation, is this something I'd do in Forms mode? Also if I have a document from rollover of employer plan to the IRA which shows the starting basis, will that be required by the IRS? Can I simply enter that amount in line 2 of my amended 2019 return (first year taking a distribution)? And it would be great if Turbotax incorporates the amendment in the tax data file so when I start my 2020 return it will have the correct basis, and then for subsequent years will carry it over.
You appear to be using the CD/download version of TurboTax, so amending your 2019 tax return is relatively straightforward. Start by making a copy of your 2019 tax file and amending with that file rather than altering the file that you used to file the original 2019 tax return. That way you can always start over.
- When you start 2019 TurboTax there's a button to click to say that you want to amend an already filed tax return.
- Click that and select the copy of the tax file that you made. (Click "Find a Tax File" if necessary.)
- Indicate that you need to change a 1099-R,
- click the Continue button on the Your 1099-R Entries page,
- answer Yes when asked if your husband made and tracked nondeductible contributions to his IRA,
- click the EasyGuide button on the next page,
- continue to where you can mark the box that says that he transferred money from an employer's retirement plan in 2019 or a previous year,
- then enter the amount of after-tax money that transferred from the employer plan.
TurboTax will then prompt for the required explanation statement for this adjustment to basis where you'll describe the transfer of after-tax basis from the 401(k). Continue through the remainder of the pages (which should require no changes), until you get back to the page asking if there is anything else that needs changing. Click Done and complete any remaining items such as the reason you are amending (which will be to indicate that you are correcting to include Form 8606 showing the adjustment to the basis in nondeductible traditional IRA contributions.
At this point TurboTax will have prepares Form 1040-X, Form 8606 and the explanation statement. I'm not sure where in step-by-step mode you can indicate whether or not you want to apply the refund to your 2020 tax liability, but you can do that directly on Form 1040-X in forms mode.
The amendment cannot be e-filed. You'll need to print and mail the Form 1040-X, Form 8606 and the explanation statement describing the adjustment to basis which TurboTax has associated with the Form 8606.
You'll use the amended copy as the source of the transfer when you begin your 2020 tax return. The amended copy will have the correct carryforward for line 2 of the 2020 Form 8606.
