We converted money from a retirement account to a Roth IRA but both amounts are adding to income

[eatright]

We have two 1099-R forms. When I enter information, it adds the two together as income but it's not.

[KenH1 · Accepted solution]

If you converted money from a traditional IRA or traditional 401k into a Roth IRA, then it is taxable income (since you are converting before-tax money into after-tax money).

The 10% additional tax on early withdrawals is waived, however.

This should all be driven by the distribution code in box 7 of your 1099-R forms.

After entering your second 1099-R, you should get to a summary screen.  When you click continue, the software will ask additional questions about the conversion that may impact your taxes.

[Lina8]

I want to convert my 401k (Principal) to Roth IRA (Fidelity). Fidelity require me to 1) open a Rollover IRA account and a Roth IRA account; 2) distribute 401k deposit to the Rollover IRA account; 3) do a Roth conversion by transferring Rollover IRA money to Roth IRA account. If I follow Fidelity's instruction, will I have to pay the 10% additional tax on early withdrawals? 

[dmertz]

If your intent is that the funds end up in a Roth IRA, there is no requirement that the funds first be moved from the 401(k) to a rollover (traditional) IRA before converting to Roth.  If somebody at Fidelity told you that you must do that, ask to speak to their supervisor so that the Fidelity rep can be corrected.  Unless you have a specific reason that you want to put the funds into a traditional IRA first, you can just open a Roth IRA at Fidelity and ask the 401(k) plan to make a direct rollover from the traditional account in the 401(k) to the Roth IRA; the 401(k) plan is required by law to offer this option (for distributions that are eligible for rollover).  Make sure that the plan knows that the rollover is to a Roth IRA, not to a traditional rollover IRA, so that the plan knows to show the correct taxable amount (the entire amount of the distribution from the traditional  account in the 401(k) unless you have after-tax funds in the traditional 401(k)) on the code-G Form 1099-R from the 401(k) plan.  Fidelity would indicate on a Form 5498 from the Roth IRA a rollover contribution of the amount deposited (not a conversion).  (On Fidelity's deposit slip for the direct rollover to the Roth IRA the Deposit Type would be indicated as a Direct Corporate Rollover, not Roth Conversion.)

Note that if you have no nondeductible traditional IRA contributions and no after-tax money in the traditional account in the 401(k), there is no taxable difference between doing a taxable rollover from the traditional 401(k) account directly to the Roth IRA and doing a nontaxable rollover first to a traditional rollover IRA and then doing the taxable conversion to Roth.  Using the intermediate rollover IRA is just an unnecessary step.

A direct rollover is exempt from the 20% tax withholding normally required on distributions that are eligible for rollover.

Amounts rolled over or converted to Roth are not subject to any 10% early-distribution penalty.

If you have funds in a Roth account in a 401(k) plan that you wish to roll over, those funds are not permitted to be rolled over to a traditional IRA.  They are only permitted to be rolled over to a Roth IRA (indirectly or directly) or directly (not indirectly) to another Roth account in a qualified retirement plan like another 401(k).

[Lina8]

Thank you very much! I called Fidelity again and the new representative confirmed your statement. This is very useful.