Pre-tax 401k portion (in-service distribution) into IRA then ROTH Conversion

[Random_Bunny]

Hello

Here is what I did in 2022:

1. I made nondeductible contribution of $6000 to my "Traditional IRA"
2. I took non-hardship distribution (in-service distribution) from my 401k. This distribution contained a majority of my 'After-Tax' contributions through the year but it also contained a small portion of "Pre-tax 401k" contribution., the amount is $260. 
3. I rolled over "After-tax" portion to "ROTH IRA" and "Pre-Tax" portion to "Traditional IRA". 
4. I then did ROTH conversion of the nondeductible $6000 along with $260 from step #2 above. There were no gains- actually small loss.

Now, I have 1099-R, with box 7 code of "2", and the gross distribution of $6260.

I understand that I don't owe any taxes on the $6000 portion since I'd categorize that contribution as nondeductible but I suppose $260 portion would need to be taxed.

If I follow ROTH conversion process then out of $6260, do I just categorize $6000 as non-deductible contribution? Which would then mean that $260 would automatically taxable and TurboTax will calculate taxes?

Should I be getting another 1099-R?

[dmertz]

Some information seems to be missing from the description of the events.

"This distribution contained a small portion of "Pre-tax 401k" contribution., the amount is $260."

Was this the entire distribution from the 401(k)?  If so, something doesn't make sense.  An in-service distribution of "contributions" (elective deferrals) you had made to the 401(k) is generally not permitted before age 59½.  Was this instead a distribution of an after-tax sub-account and the $260 was investment gain (not contributions)?  If so, what the after-tax portion rolled over directly to a Roth IRA (so-called mega-backdoor Roth)?  If so, why didn't you just directly roll the entire distribution over to the Roth IRA?

I'm guessing that you received a code-G Form 1099-R reporting the distribution from the 401(k) that is also reportable.

The $260 is not a regular traditional IRA contribution (unless it was somehow a distribution that was not eligible for rollover).  For the information that follows, I'll assume that no after-tax money was rolled over from the 401(k) to your traditional IRA.  You must enter the $6,000 nondeductible traditional IRA contribution under Deductions & Credits.  TurboTax will then include this on Form 8606 line 1.  On the rest of the form (or, more likely, TurboTax's version of Worksheet 1-1 Form IRS Pub 590-B) TurboTax will calculate the taxable amount using your $6,000 basis in nondeductible traditional IRA contributions.  Also be sure to enter your year-end value in traditional IRAs.  (If the year-end value in traditional IRAs was nonzero, more than $260 will be taxable and some amount of your basis in nondeductible traditional IRA contributions remains in your traditional IRAs to reduce the taxable amount of future traditional IRA distributions.)

[Random_Bunny]

@dmertz Good catch. I changed my original post, please see. You are right about something but your assumption is not entirely correct. I have made the changes to the post and you will see what I mean. Thank you for taking time to respond.

[dmertz]

If you haven't received it already, you will receive a Form 1099-R reporting a distribution from the 401(k).  Unfortunately, TurboTax is unable to handle a split rollover reported on a single Form 1099-R, so you'll need to split it into two for entry into TurboTax, one for the portion rolled over to the Roth IRA (the amount shown in box 5) and the other for the $260 rolled over to the traditional IRA (enter $0 in box 5 of this one).

The $6,000 traditional IRA contribution that you've indicated was nondeductible must be entered under Deductions & Credits and the Roth conversion is reported by entering the code-2 Form 1099-R and indicating that you moved it to another retirement account, that you did a combination of rolling over, converting and cashing out, then enter $6,260 as the amount converted.  After entering the Forms 1099-R, click the Continue button on the page that lists the Forms 1099-R that you have entered and be sure to enter the 2022 year-end value of your traditional IRAs (presumably zero).

[Random_Bunny]

@dmertz  thank you again. I am still not completely following... I think I am generally following what you said in the second paragraph, but didn't follow what you were saying in the first paragraph. Here is the picture I drew on a whiteboard to better explain. I really appreciate the help.

[dmertz]

The first paragraph addresses the reporting of the distribution from the 401(k) that was split to two destination accounts.  If the distribution was directly rolled over, you should receive a Form 1099-R showing a gross distribution of $5,260 in box 1, $0 in box 2a, (probably) $5,000 in box 5 and code G in box 7. 

For entry into TurboTax this Form 1099-R will need to be split into two, one showing just the portion rolled over to the Roth IRA ($5,000) and the other for the portion rolled over to the traditional IRA ($260).  Boxes 1, 2a and 5 on these two forms must sum to the same amounts as shown on the form provided by the payer.  (TurboTax does not support the entry of a single Form 1099-R reporting a split distribution.)  The rollover from the 401(k) is reportable but nontaxable.

The distribution from the 401(k) would have been simpler had the entire $5,260 just been rolled over to the Roth IRA, not splitting the distribution.  The taxable result would have been the same with less complicated reporting.

[Random_Bunny]

Thank you again @dmertz  I think I may be very close to cracking this because of you- I really appreciate the help.

I did some more digging and found out that I do have 2 more 1099-Rs from 401k in addition to the one I have shown in the picture, which is from my IRA. So, altogether here are the forms I have.

1. 1099-R showing $5000 (after-tax portion of the 401k dist.) which was rolled over to ROTH and it has distribution code "1" 
2. 1099-R showing $260 (pre-tax portion of the 401k dist.) which was rolled over to Traditional IRA and it has distribution code "G".
3. 1099-R showing $6,260 for the ROTH conversion (non-deductible contribution to Traditional IRA of $6000 + $260 from step #2 above) and it has distribution code "2".

So, following your advice- I need to enter all 3 of the above 1099-Rs in to TurboTax. Will you be able to guide then how to deal with these 3 specific 1099-Rs- assuming only the amount in #2 and the associated ROTH conversion should trigger tax implication since rest are all after-tax dollars.

[dmertz]

Then the two portions of the distribution from the 401(k) are already on separate Forms 1099-R.  Enter the code-1 Form 1099-R, indicate that it was moved to another retirement account, that you did a combination of rolling over, converting and cashing out, then enter $5,000 as the amount converted to Roth.  This Form 1099-R will have $0 in box 2a and $5,000 in box 5 to indicate that the distribution is nontaxable.

For the code-G form 1099-R, indicate that you did not roll it over to any kind of Roth account so that TurboTax will treat it as a rollover to the traditional IRA.  (The Roth conversion is a separate transaction reported via the code-2 Form 1099-R from the traditional IRA.)

[Random_Bunny]

Thank you @dmertz Really helpful.

One correction... instead of choosing I did combination of rollover, cash out.... I chose I rolled over inside 60 days to another IRA account... and said I rolled over all the money.....that did the trick. 

Still working through the rest... its a process 🙂 Will come back if I get stuck 

[Random_Bunny]

@dmertz 

One place where I am getting stuck.

I was able to put in all my 1099-Rs including code G ($265 from my pre tax 401k roll over to Traditional IRA) saying I did not roll over in to Roth. Then I put in Roth conversion using code 2 which had nondeductible contribution of $6000 + $265. 

TurboTax then said

which doesn't make sense. $260 should be taxable because it came from 401k pre-tax portion. Looks like TurboTax is treating nondeductible contribution ($6000) and pre-tax roll over to IRA ($265)  as non-taxable... but in fact, $265 should be taxable.

Can you help?

[dmertz]

TurboTax is referring to the code-G Form 1099-R which is reporting the nontaxable rollover of $265.54 to the traditional IRA.  The $265.54 does not become taxable until you convert it to Roth in the subsequent transaction, reported on the code-2 Form 1099-R.

[Random_Bunny]

Yes that is exactly my question @dmertz 

I entered Roth conversion through code-2 but my taxes did not go up. I assumed they would go up by $25-$50 roughly on the $265. I understand that there should be no tax implication from nondeductible contribution portion that was converted to Roth... but this other portion should have tax implications is what I believe.

But in the screen show above, TurboTax says only ZERO of my reported $265 is taxable. That does not sound correct. 

[dmertz]

Check your Form 8606 to review the calculation of the taxable amount of the Roth conversion.  As I understand it your Form 8606 should show only $6,000 on line 3 and should show $6,265 on line 8 or (or should show these amounts on the associated worksheet if your Form 8606 shows asterisks next to lines 13 and 15).  Form 8606 line 16 should show $6,265, line 17 should show $6,000, and line 18 should show $265.

[Random_Bunny]

@dmertz 

How do I check this in Turbotax? Can I preview 8606 without actually filing taxes through Turbotax to make sure what you are advising is what I am seeing?

[dmertz]

You can (and should always) view and print your tax return and supporting pages before filing.  If you are using TurboTax Online and your tax return does not qualify for free filing, you must pay for TurboTax before viewing and printing your tax return.