After Tax 401k into Traditional IRA, plus Backdoor Contribution

[BrooklynThomas]

Hi All,

I have seen a bit on how to handle withdrawals from after-tax 401k, but none match mine exactly, and I am definitely quite confused by how to handle it ...

Basically I'm working on my 2022 taxes (which I put off doing becaues of this issue)...

Part 1:

I have a total withdrawal from after-tax contributions to employer 401k.  And a corresponding 1099-R from the 401k custodian which shows:

Box 1: 20,000

Box 2: Blank

Box 2b: Unchecked

Box 5: 19,000

Box 7: G

(This is reflective of earnings of 1,000 on the after-tax holdings).

Because my 401k woudln't allow me to withdraw into both Traditional IRA and Roth IRA, I rolled it all into the traditional.

Part 2:

I also made a 6,000 backdoor roth contribution to the account in Jan of 2023 for 2022.

I have a 2022 5498 that shows:

Box 1, the 6,000 contribution for 2022

Box 2, the 20,000 rollover contribution (the withdrawal was in two 10k parts, once early and once late in year)

Box 5, 10,000 fmv on 12/31/2022 (reflective of 16,000 I rolled into a Roth IRA in 2022).

Part 3:

As Noted I have a 1099-R for the Traditional IRA which shows

Box 1: 16,000

Box 2a: 16,000

Box 2b: both checked 

Box 7: 2

IRA/SEP/SIMPLE: Checked

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In conclusion I have tried to enter these based on how Turbo tax asks for them, but TT is telling me I have overcontributed (I have not ... only 6k) and that I owe taxes.... Both are not true (at least I asked my accountant up front before withdrawing depositint etc.  Anyone have insights on how to handle this?

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For extra credit...

I noted that I withdrew money from my After Tax 401k Twice.  

The first time, I had a 1000 gain (9k became 10k).

The second time, I had a 1000 loss (11k became 10k).

As you can see this should be a wash with no taxes, but the 401k didn't show the loss just the amount withdrawn....  Anyone ever seen this before?  I think I could overwrite the 1099R as I am entering it with correct value as I have documentation, but maybe there is something I am missing.

Thanks!!!

[Opus 17]

I think you did something illegal.  You can't rollover an after-tax 401k (you mean a Roth 401k, right) into a traditional IRA.  And the IRA custodian shouldn't have accepted the funds, if they knew what was going on.  Any pre-tax 401k could be rolled over into a traditional IRA but an after-tax 401k can only be rolled over into a Roth IRA.

@dmertz 

[dmertz · Accepted solution]

There is nothing illegal about the rollover of after-tax money from a traditional 401(k) to a traditional IRA.  No Roth 401(k) funds are involved.

The following assumes that you have no other traditional IRAs and that your total balance in traditional IRAs at the end of 2022 was $10,000. 

1. Enter the code-G Form 1099-R and answer No to each of the questions that ask if you rolled it over to any type of Roth account.
2. Enter the code-2 Form 1099-R and indicate that you moved the money to another retirement account, that you did a combination of rolling over converting and cashing out, then enter $16,000 as the amount converted to Roth.
3. Click the Continue button on the page that lists the Forms 1099-R that you have entered.
4. Continue until TurboTax asks if you made and tracked nondeductible contributions to your traditional IRAs and answer Yes.
5. Click the EasyGuide button.  Continue, mark the box to indicate that you transferred money from an employer plan and Continue.
6. Enter $19,000 as the basis rolled over from the 401(k), Continue, then explain that this $19,000 is after-tax basis rolled over form the 401(k).
7. Enter $10,000 as the 2022 year-end value in your traditional IRAs.
8. Under Deductions & Credits, enter your $6,000 contribution made for 2022 and indicate that all $6,000 of that contribution was made in 2023.
9. Continue and answer Yes when again asks if you made an tracked nondeductible traditional IRA contributions.  Just click Continue since you already did the EasyGuide thing.

TurboTax will prepare Form 8606 (using Worksheet 1-1 From IRS Pub 590-B) to calculate the taxable amount of your Roth conversion (line 18 = $615) and the amount of basis in nondeductible traditional IRA contributions that remains in your traditional IRAs (line 14 = $9,615).

Again assuming that you have no other traditional IRAs, it makes little sense to me that in 2022 you did not convert everything in your traditional IRAs to Roth, leaving a $0 balance at year-end.

[BrooklynThomas]

@dmertz Thanks!

This worked -- though now that I have entered it -- and generally understand it I realize I have a couple remaining question.

Jan 11, 2022 I made a 6,000 backdoor contribution FOR 2021 into traditional IRA

Later in 2022 I made the 20,000 withdrawal into the traditional IRA (covered in the 1099-R Code G)

Also the 16,000 conversion into the Roth (covered in the 1099-R Code 2)

Finally in Jan 2023 I made a 6,000 backdoor contribution FOR 2022 into traditional IRA

So ... all of the numbers seem right from a taxable standpoint, but I am wondering if my 2022 Basis should be 6,000 higher (guessing the basis includes both the "for 2021" donation and the "for 2022" donation).

This all should come out in the wash for the 2023 basis but thinking maybe I should have added an extra 6,000 somewhere in there?  (What step would that have been?).

Thanks AGAIN

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Then that just leaves the question about the after tax 401k 1099-r not getting the pre- and post- tax numbers right since I had substantial loss on the withdrawal and not a gain (as I noted in the extra credit.  Assume I can just modify the number in box 5 of the 1099-r box g).

[dmertz · Accepted solution]

Your 2021 tax return should have included Form 8606 reporting the $6,000 nondeductible traditional IRA contribution on line 1.  The $6,000 will fall through to line 14 which carries forward to your 2022 Form 8606 line 2 and your $19,000 after-tax basis would be added to that for a total of $25,000 on line 2 of your 2022 Form 8606.  Of course this change to line 2 affects the pro rata calculation that follows, so the nontaxable amount of the Roth conversion will be higher since is includes a large portion of your basis in nondeductible traditional IRA contributions.

Using Worksheet 1-1 from IRS Pub 590-B, TurboTax will also likely include the $6,000 contributed in 2023 for 2022 as part of your basis in nondeductible traditional IRA contributions used in doing the pro rata calculation.

[BrooklynThomas]

This makes sense -- however, the ratio on line 7 ends up over 1.0.  I must be doing something wrong but not immediately apparent.  It makes sense that I would be converting MORE non-taxable given that more non-taxable is in the basis, but I don't think it should be zero.

Thanks!

[dmertz]

I'm not sure what form or worksheet has the ratio on line 7.  Did you mean to say a different line?

The calculated ratio can only be greater than 1 if the investments in your traditional IRAs have lost value and the total value of all of your traditional IRAs plus the amounts of any distributions and conversions is less than your basis.  However, your description suggests that this is not the case.  Make sure that the form shows the correct year end value in your traditional IRAs.