How to report mega backdoor Roth IRA early withdrawal without penalty?

[randwalk]

Hi turbotax community,

I opened the Roth IRA using the mega backdoor approach on 2023. I.e. I contributed after-tax 401k and my employer supports instantly auto-converting that to Roth 401k (i.e. no capital gain during this process). Then I further roll it over to Roth IRA. I have put a few thousands into Roth IRA like this in 2023 and 2024.

In 2024, I withdrawn $100 and cashed out the check. But when I do my tax using desktop Turbotax Premier  today, I'm surprised to find it shows I need to pay $10 penalty (I'm under 59 years old). I don't think I should pay penalty because I didn't withdraw the earning part.

Does anyone know what might be missing? I got two 1099R, one for the rollover with code G, and one for the $100 early withdraw with code J. I'm also surprised that turbotax didn't ask me to input all my Roth IRA roll over history (because if I understand correctly, if I rolled over $5k in total via mega backdoor in the past, then I will be able to early withdraw $5k anytime with no penalty).

Thanks!

[DavidD66 · Accepted solution]

Withdrawals of your Roth IRA basis (the amounts that you contributed to your Roth IRA) can be withdrawn at any time without taxes or penalties.  Your 1099-R should have Distribution code - J in Box 7, which indicates "Early distribution from a Roth IRA, no known exception".  Your answers to the questions TurboTax asks you after you enter or upload your 1099-R will determine whether or not your withdrawal is subject to tax and/or penalty.  Review your 1099-R and make sure of the following:

• Box 2a - Taxable Amount is blank
• Box2b - Taxable Amount not determined is checked
• You answer YES to "Did this money come from a Roth IRA"?
• On the screen Enter Prior Year Roth IRA Contributions - Roth IRA Contributions prior to 2024 - The amount for contributions you enter must be at least as much as your withdrawal - $7,000.

You may need to delete your 1099-R in TurboTax and re-enter to access all of the questions. 

[randwalk]

Thank you for the prompt reply! But I'm still confused on 3 things:

1. I did not directly contribute to the Roth IRA, instead I did a mega backdoor roll over (post-tax 401k -> roth 401k -> roth IRA). Should I enter this roll over amount as "Enter Prior Year Roth IRA Contributions" ?
2. I also noticed there are questions asking "Did you convert a traditional IRA to a Roth IRA before 2024" and can input "Taxable Conversions" and "Nontaxable Conversions". However, the help page shows this is about traditional IRA -> roth IRA conversions, so I'm not sure if roll over belongs to this section?
3. I tried both approach and find the federal tax refund amount did get higher but by $34, instead of the penalty amount (which is $10). So I want to double check with my previous 2 questions in case the "Roth IRA contribution amount" has other side-effect.

Could you help with these? Thanks in advance!

CC @DavidD66 

[DavidD66]

You need to tell the program what your basis in the Roth IRA is.  Converting after-tax 401(k) contributions to a Roth IRA is not common, so the program provide that scenario.   Either method  you describe will allow you to enter your Roth basis, which is all your trying to accomplish.  I would choose the first and indicate that you made prior Roth contributions.  You're not making a statement that will be reported on your tax return, just trying to get some information into the program so it calculates things correctly.   There are no other "side-effects".