2021 Individual 401k to Roth 401k Rollover - Should be taxable but TurboTax says not

[Jameson94]

Hi: 

In 2021 I did an in-plan direct rollover from my Individual 401k to my Individual Roth 401k.  This rollover should be taxable.  

My broker issued a 1099-R with the correct amount in Box 1 but $0 in Box 2a.  Code G in box 7.  

I entered the 1099-R into TurboTax as presented.  I then checked yes to the "Is this 1099-R reporting a rollover of funds from a 401(k) plan to a designated Roth 401(k) plan".  

But, when I look at the 1040, the distribution shows up as not taxable (1040 line 5b is $0).

Does anyone have any insight as to what's going on here and how I can get this correctly reported?

Thanks.

[macuser_22]

Unless box 5 is the same as box 1 then the 1099-R does not indicate a 401(k) to Roth account - it indicates a 401(k) to Traditional IRA account rollover which is tax free.

If box 5 is the same as box 1 then that says that all of the amount consist of your own after-tax contributions (box 5) so none of it is taxable, but in that case box 2a should be blank not zero, but in this case a zero will not mater.

If the 1099-R is improper then you need to contact the plan administrator for a corrected 1099-R.

[fanfare]

It's time to find out exactly what the custodian did, and double check what type of account your money went into.

[Jameson94]

For clarity here - let's be precise in our terminology... we are only talking about an individual 401k and an individual roth 401k in the same "plan" with a major brokerage (the ones with the baby in the commercial). 

There is NO Traditional or Roth IRA - so lets not confuse things.

That being said - the 1099-R issued by the brokerage has the rollover (conversion) amount in box 1, box 2a is $0.00, and box 7 is Code G.  I inquired about this with the brokerage and they claim that their 1099-R is correct given that it is an "in plan rollover".  Both they and I agree that it is taxable income, but that putting $0.00 in box 2a is consistent with IRS guidelines: (https://www.irs.gov/instructions/i1099r#en_US_2022_publink[phone number removed])

So when I enter the 1099-R in TurboTax, it questions me a couple times to be sure that box 2a is really zero.  It then asks ""Is this a rollover from a 401k plan to a Roth 401k plan" which I check "YES" to...  

My question where do I correctly document this in TurboTax so that it shows up as taxable?    

Here is the response from the brokerage: 

""

After reviewing your account, the transfer was a Direct In Plan Roth Rollover Request.

Customers that request to rollover assets from their Individual 401(k) account to their Individual Roth 401(k) account that was opened under the same plan is considered an In-Plan Roth Rollover (IRR).

Customers rolling over assets to their Individual Roth 401(k) account will generally include this amount in their gross income - very similar to a Roth Conversion. The rollover will not show as a taxable distribution or conversion. It is solely up to the customer to report any taxable portion of the IRR when filing their taxes.

""

[dmertz]

In TurboTax you'll need to prepare a substitute Form 1099-R (Form 4852) showing the correct taxable amount in box 2a.

[fanfare]

Why not just enter the rollover amount into the taxable amount box. ?

This will have the desired effect. exactly as suggested by e-Trade.

If you are using CD/Download program, you can enter an explanation, if desired.

"Eyes on the road, Ben".

[dmertz]

Simply changing the amount entered in box 2a without submitting a substitute Form 1099-R runs the risk of the IRS detecting the difference between what the IRS calculates from the Form 1099-R provided to them by the plan and what was reported on the tax return, causing the IRS to "correct" the tax return and issue a refund.  A substitute Form 1099-R (Form 4852) is the defined method by which one disagrees with what the plan reported and is where the explanation belongs.

[fanfare]

If I do this in TaxAct, it provides an extra box for me  to enter the taxable amount  which is included in Line 5b.

The word "Rollover" also appears.

[Jameson94]

Just a brief update - 

I'm trying to get MS/ET to issue a corrected 1099-R with the In Plan Roth Rollover (IRR) amount in box 2a, or at least checking box 2b if they can't/wont determine the taxable amount.  Their turnaround time on their support messaging system is 2 weeks, so I guess we'll see.  

My read on the rules based on this: 

https://www.irs.gov/instructions/i1099r#en_US_2022_publink

is that when I read the "Box 2a. Taxable Amount" section, the first bullet point is "... Enter 0 (zero) in box 2a for: - A direct rollover (other than an IRR) from a qualified plan, a section 403(b) plan ... "

The implication being that they should be reporting the IRR amount in box 2a.  

Does anyone have a link to a more on-point guidance from IRS on how to fill out a 1099-R for the IRR case?  I haven't found anything directly prescriptive, only the "other than an IRR" language noted above.

Thanks.

[dmertz]

Refer to the instructions for box 2a of Form 1099-R ("Generally, you must enter the taxable amount in box 2a.").  To determine the taxable amount, refer to IRS Notice 2010-84 Q&A-7 and -9:

https://www.irs.gov/pub/irs-drop/n-10-84.pdf

and 26 USC 402A(c)(4):

https://www.law.cornell.edu/uscode/text/26/402A

[Jameson94]

Still not resolved:  

Was I supposed to issue the 1099-R and not E*Trade?  In which case, why did they issue one at all?  My personal take is that they should have at lease issued one with Box 2a as blank and box 2b checked "unable to determine taxable amount.  

But - bottom line - seems like I should move my accounts out of this Company given that they don't seem to understand the time of day.

Our friends at E*Trade / Morgan Stanley offered the latest guidance on their 1099-R issuance : 

""

Thank you for your message regarding the reporting done on your in plan Roth Rollover.

In the terms of setting up a 401k with ETRADE, we specifically state that we do not report the taxability of in plan Roth Rollover request's. We place that responsibility upon the plan administrator or the account holder if you don't have a plan administrator. Please reference page 19 where it talks about in plan Roth Rollovers.

https://content.etrade.com/etrade/estation/pdf/401kPlanDescriptionBooklet.pdf

We can't determine taxability since we don't report contributions.

""

[dmertz]

Their reply makes no sense to me.  If they prepare a Form 1099-R, they are obligated to prepare it accurately.  For a direct In-plan Roth Rollover that means a code-G Form 1099-R showing either the correct taxable amount in box 2a or leaving box 2a blank and marking box 2b Taxable amount not determined.

To get correct treatment in TurboTax, you'll either need to enter the correct taxable amount in box 2a or leave box 2a blank and mark box 2b Taxable amount not determined.  Since that disagrees with the Form 1099-R provided by E*TRADE, it probably makes sense to do it as a substitute Form 1099-R which would preclude e-filing.

[fanfare]

" it probably makes sense to do it as a substitute Form 1099-R which would preclude e-filing."

Note that paper-filed 2021 tax returns are on hold until the IRS works through its backlog of 2020 paper-filed tax returns, which is expected to take the rest of 2022.

Per the IRS Commissioner and the Taxpayer Advocate Erin Collins.

If you're not looking for a refund, I guess this doesn't matter to you.

[Critter-3]

The easiest way to accomplish this in the TT program is to simply change the code in box 7 from G to a 7 ... doing so will have the amount taxed as desired.  The IRS will not object if you want to pay taxes on more than required ... they only object to the opposite.