1099-R, box 5 amount

[DeadEwok]

Hey all. I did a 401K rollover to a new employer included money from a Roth as well. I received three 1099Rs. One of them has $0 in box one and in box 2A and the code is 1B. There is a small amount in box five. Do I have to even report this 1099R? From what I'm gathering this is recoverable funds so money paid taxes on I shouldn't have?

[dmertz]

This is a distribution to you of unrecoverable basis in Roth 401(k) contributions because the value of your original Roth 401(k) had dropped below what you had contributed.

If the Tax Cuts and Jobs Act of 2017 had not suspended miscellaneous deductions subject to the 2% of AGI limit for 2018 through 2025, the amount in box 5 could have been deductible on Schedule A.  With that suspension, there is no deduction for the unrecoverable basis.  (Even if these deductions had not been suspended, you would still only benefit from the deduction if your itemized deductions were more than the standard deduction.  See Losses on page 23 of IRS Pub 575:

https://www.irs.gov/pub/irs-pdf/p575.pdf

[DeadEwok]

Thanks for the response! It shows a 1B code which makes it sound like this was a distribution to me. The software is telling me I might need to pay taxes on it. This doesn't seem quite right, is the distribution code correct? Fidelity told me to consult a CPA and that it's correct but this wasn't a distribution or money I received in my pocket to count as income.

[dmertz]

It is a distribution to you in that the loss that it represents could not be rolled over to the new retirement account, so the loss had to be "paid" out to you.

The code 1 is causing TurboTax to tell you that the taxable amount of the distribution is subject to an excess-accumulation penalty.  Of course with the taxable amount being zero, the penalty is 10% of zero which is zero, so the entry of this form into TurboTax has no effect on your tax return.  Because this form has no effect on your tax return, you can either include it just to record it within TurboTax or omit it.

Prior to 2018 you could have entered the  box-5 amount into TurboTax as an expense subject to the 2%-of-AGI limitation (those versions of TurboTax did not do this automatically), but that section is not currently present in TurboTax because of the change that I mentioned made by the Tax Cuts and Jobs Act.