Roth cost basis / distribution being incorrectly taxed

[daniel1105]

I have received a 1099 and took a full distribution on my roth ira.  I have tracked my cost basis over  the years on form 8606.  I took a 27k non qualified distribution.  My basis is 25500.00.  Basic knowledge would tell me that I will pay the penalty/tax on the amount over the basis; however, turbo tax keeps calculating the full distribution as taxable.  I did go through the screens and enter the cost basis, but it is still trying to tax me on the entire 27k as opposed to 1500.00 (amount over cost basis/contributions).  I also rolled over a roth 401k into a roth ira.  I have my contributions for this as well.  My other question is, can I add this to my basis as well?  At that very least, will someone please tell me how to find the correct area so that the software will realize that my roth distribution is not fully taxable?  You think it would subtract my basis from the distribution and tax me on the amount above the basis.  Sounds simple, but this software is making it difficult.

[dmertz · Accepted solution]

You'll want to confirm that the code in box 7 of your Form 1099-R is correct.  A regular distribution from your Roth IRA that is potentially taxable will have code J or T in box 7.

It seems that you have already done so, but make sure that you click the Continue button on the Your 1099-R Entries page to reach the Enter Prior Year Roth Contributions page where you must enter your Roth IRA contribution basis from years before 2015.  Current year contributions will be handled automatically when entered as a new contribution for 2015.

The basis that you had in Roth 401(k) contributions when you rolled the money over to a Roth IRA transfers to the Roth IRA.  This amount will have been shown in box 5 of the From 1099-R reporting the distribution from the Roth 401(k).  If this rollover from the Roth 401(k) occurred in a year before 2015, include the transferred basis when TurboTax asks you to Enter Prior Year Roth Contributions.  If the rollover from the Roth 401(k) occurred in 2015, the amount of transferred basis will automatically be recorded by TurboTax.

Note that Form 8606 has nothing to do with tracking basis in Roth IRAs.  The only basis it tracks is basis in nondeductible contributions in traditional IRAs.  Tracking Roth IRA basis is the Roth IRA owner's responsibility (with the help of TurboTax).

[186kmph]

I believe this response is incorrect, the total non deductible basis of "all" previous back-door Roth contributions are to be additive and entered on line 24 in 8606.  There appears to be an inability to update this basis in the turbo-tax 2017 version I am using.  You can review the IRS instruction for Line 24 on 8606 for more details.

[dmertz]

Based on the instructions for Form 8606, the answer I gave and the way TurboTax works are correct.  The instructions for Line 22 of Form 8606 say, "Increase the amount on line 22 by any amount rolled in from a designated Roth account that is treated as investment in the contract."  The "investment in the contract" is the contribution basis in the Roth 401(k) plus the basis from In-plan Roth Rollovers that have met the 5-year holding period, or it's the entire amount rolled over to the Roth IRA from a Roth 401(k) if the distribution from the Roth 401(k) would have been a qualified distribution had the distribution not been rolled over.

Also, the instructions for line 24 of Form 8606 say, "Don’t include amounts rolled in from a designated Roth account since these amounts are included on line 22."

(Note that "designated Roth account" is the formal term for Roth 401(k), Roth 403(b) and Roth 457(b) accounts.  Where the instructions refer to "qualified retirement plan," they are typically referring to the *traditional* account in a 401(k), 403(b) or 457(b).  The instruction for line 24 referring to rollovers from a qualified retirement plan was added in 2008 when rollovers directly to a Roth IRA from a traditional account in a qualified retirement plan became permissible, essentially equivalent to a Roth conversion.)