Retired. Employer retirement plan. Have 401(K) and Roth 401(K) in account. Have taken no distributions from Plan. December 2023 I did an in-plan rollover from 401(K) to Roth 401(K). Entered info on 1099-R correctly. TurboTax shows a tax penalty of over $1k.
What is wrong?
The 10% early withdrawal penalty or a tax due penalty on 1040 line 38? Did they take any tax withholding out of the transfer? What code is in box 7? @dmertz
The estimated tax penalty is on line 38. The code in box 7 is G.
That's not on your 401K 1099R but for owing too much on your total tax return. If you do not pay in enough tax from withholding and estimates, you may have to pay a penalty for underpayment of estimated tax. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.
You might be able to eliminate it or at least reduce it. You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you. It's form 2210.
It's under
Federal or Personal (for Home & Business Desktop)
Other Tax Situations
Additional Tax Payments
Underpayment Penalties - Click the Start or update button
The code is accurate because it was a trustee to trustee transfer. However, the full amount of the transfer is taxable income and added to the rest of your income to determine your total tax liability. There was no withholding on this which is good and can be bad. The good part is the full amount withdrawn was transferred to the Roth and you did not have to make up any difference for a withholding amount to make sure of a full transfer. The other good news is that there is no 10% penalty since the full amount withdrawn was rolled over.
The bad news is that because there was no withholding the full amount is added to your other income and it's quite possible, and based on your question, that there was not sufficient withholding from other earnings such as your salary to account for the additional income tax for this. Any regular 401(k) rolled into a Roth will be taxable funds because you did not pay tax on those funds in the past.
As indicated by xmasbaby0, you may be able to reduce any penalty, if applicable, by following the instructions posted, depending when the transaction occurred.