Incorrect Roth IRA MAGI Calculation Causing Excess Roth Contributions

[azdbacker2]

I completed an in-plan Roth rollover (conversion).  The 1099-R indicates code G (rollover).  I answered that it was a retirement plan in-plan conversion in the answers.   The resulting 1099-R form in TurboTax correctly indicates that it was an in-plan Roth Rollover (IRR) on line B7.  The AGI including the conversion exceeds the limit for Roth IRA contributions.  IRS 590-A, Worksheet 2-1, indicates that the amount of the Roth Conversion is subtracted from the AGI to determine the Roth IRA MAGI.  That places my MAGI well under the cap.

However, TurboTax does not subtract out the amount and indicates that our Roth IRA contributions are excess contributions.  Am I missing something in the way I am entering it or is TurboTax's MAGI calculation, which is all done in the background and can't be confirmed, incorrect?

[dmertz]

TurboTax is behaving correctly.  The piece of information that you are missing is that the tax code does not permit IRRs to be subtracted from AGI when calculating the MAGI for making a Roth IRA contribution.  Only  the taxable amount of Roth conversions and rollovers from traditional accounts in qualified retirement plans to a Roth IRA are to be subtracted.  Unfortunate, but true.  (26 U.S. Code § 408A(c)(3)(B)(i))

(The designated Roth account in a qualified retirement plan is not a Roth IRA.)

[azdbacker2]

Thank you, dmertz.  The general information being circulated is a blanket statement about Roth conversions without being specific to the type of plan/account.  This one caught me by surprise.  Is the best path to move the 2023 contributions and accrued interest to a taxable brokerage account, update the info in TurboTax, and file an amended return?

[dmertz]

To correct an excess Roth IRA contribution you can either request an explicit return of contribution or by recharacterization of the contribution to be a traditional IRA contribution (possibly nondeductible) instead.  The returned or recharacterized contribution is accompanied by the attributable investment gain, which should be calculated by the Roth IRA custodian.  The deadline to do either of these is the due date of your 2023 tax return, including extensions.

Once that is done, yes, you will need to amend your 2023 tax return if it has already been filed.

The term "Roth conversion" has different meanings depending on the context.  The tax code defines it as only the movement of funds from a traditional IRA to a Roth IRA.  The movement of funds from a traditional account in a qualified retirement plan to a Roth account is called a taxable rollover and, if done to the designated Roth account in the plan, is called an IRR, as you mentioned.  However, because of the similarities in moving funds from a traditional account to a Roth account in a taxable transaction, common usage tends to apply the term "Roth conversion" to all of these.