Cashing out IRA early is being counted as rollover

[bballlova99]

I did a backdoor roth in 2022 but before that, I also cashed out the money in my traditional IRA (which was rolled over from a traditional 401k) (assume $100)

I would believe I have to pay taxes on the $100 from the cashout but not the backdoor roth money. However, turbo tax is treating this all as rollover even though I marked it as distribution code 1

[DanaB27]

Please review your entries with the follow-up questions when you enter Form 1099-R. You will need to enter the conversion amount (steps 8 and 9).

To enter the 1099-R conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account" (any amount not entered is considered cashed out).
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please be aware if you had pre-tax funds from your 401k rollover in your traditional IRA now the pro-rata rule applies. This means that with each distribution/ conversion, you will have a taxable and nontaxable part. You can see the remaining basis on line 14 of Form 8606, this basis can be carried forward. Therefore, each distribution/conversion in the future will have a taxable and nontaxable part until the basis is all used.

To enter the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had nondeductible contributions before this tax year
10. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

[bballlova99]

I only want to mark a portion of it as rolled over.

I have rolled over 6000 from one traditional IRA to a roth IRA.

In a separate IRA, I have cashed out $100. I want to mark the $100 as cashed and pay taxes on it but not mark it as rolled over.

[AnnetteB6]

Since you have two separate accounts involved, you should have two Form 1099-R to enter into your return.  One for the back door Roth IRA conversion (not rollover) and one for the $100 that you simply cashed out.

After you enter each Form 1099-R, there will be follow-up questions to answer.  For the 1099-R reporting the amount that was converted to the Roth IRA, answer the questions with that in mind.  The key point to remember is that you are indicating that the money was converted to a Roth IRA, not rolled over to another account.

For the 1099-R reporting the $100 that you wanted to cash out, watch for the question that asked if you simply cashed out the money or 'did something else' with it.

If you only have a single Form 1099-R reporting both the amount that was converted to the Roth IRA and the amount that you cashed out (for your example, $6100), then you will go through the first set of steps mentioned in the post above by DanaB to indicate that you did a combination of things with the money.  You will enter $6000 in the conversion box and anything leftover ($100) will be considered to have been cashed out.  

@bballlova99 

[bballlova99]

I have two 1099-Rs. I have put them both separately in turbotax. 

For the rollover 1099-R, i have given it the code 2 and marked that I rolled over all of the money ($6000)

For my cashed out 1099-R, the code is 1. It does have a state distrubtion on it for the full amount ($141). I have marked that I've cashed it out 

The 1040 still has 6141 in field 4a and 0 in field 4b

[MarilynG1]

Remember that reporting a Back Door Roth is a two-step process.  First, you report the non-deductible IRA contribution.  Then, you enter the Conversion from Traditional IRA to Roth IRA.  Click this link for detailed instructions (and screenshots). 

For the IRA that was cashed out, enter the 1099-R exactly as it is reported to you.

@bballlova99 

[bballlova99]

I have temporarily removed the rollover IRA.

Now I just have my cashed out IRA entered.

I have entered 141 in boxes 1 and 2a.

For 2b i have checked both boxes

for 7, i have put code 1 and checked the IRA box

I filed out the stated tax saying 141 is the distribution amount

I have marked that I havent inherited this IRA, I did something else (Cashed out), didnt put it in an HSA, no disaster.

My 1040 shows 4a being 141 and 4b being 0. Why is 4b $0 and not 141?


On my turbo tax  cashed out1099-R. B4 says 141.15. Im not sure why 

[bballlova99]

I've spent hours on this issue and the form fills out correctly on other platforms like Cashapp Taxes and FreeTax USA. I know how to input the form. Please help me.

[Opus 17]

When performing a “backdoor Roth conversion“, all of your IRA balances are aggregated together. If you don’t convert the entire amount, then you keep a taxable basis in your traditional IRA. You can’t selectively convert specific dollars.

For example, suppose you have $6000 in IRA number 1. You make a nondeductible contribution of $6000 to IRA number 2, and then convert it to a Roth IRA.  Under that circumstance, your IRA balances are aggregated together. You have a $12,000 IRA balance of which you are converting $6000 or 50%. That means that 50% of the conversion is treated as a taxable event  (because you are converting part of the pretax IRA) and 50% is nontaxable, and you are left with a $6000 IRA that has a $3000 nondeductible basis in it.

The back door, Roth only works if you have no other IRA balances, or you convert your entire IRA balance at the same time.

without knowing the exact numbers of each transaction, we can’t tell you if TurboTax is calculating it correctly. But you can’t make a back door Roth conversion and have it work the way you want it to if you have another IRA balance at the same time.