1099-R 401K after tax contributions rollover to Roth IRA and IRA account

[bAher]

For the manually added Roth 1099-R, should box 7 distribution code be changed to H?

[macuser_22]

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@bAher wrote:

For the manually added Roth 1099-R, should box 7 distribution code be changed to H?

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Use the code that is on the 1099-R that you received.  If that WAS a code H then it cannot be split.   Only a code G can be split.

[JillS56]

No, you should not change the code in Box 7 of the 1099-R.  The Code should be reported as shown on the 1099-R.   If you feel the Code on your 1099-R Box 7 is incorrect, you need to contact the payee and ask them the question of whether it is the correct Code.   If it is found to be incorrect, they should issue you a corrected 1099-R with the correct Code.

@bAher 

[dmertz]

Code H is only for a rollover from a designated Roth account in an employer plan to a Roth IRA.  The code 7 indicates that the distribution was not from a designated Roth account.  Code 7 must be used.

[LabRetriever]

dmertz,

THANK YOU for this answer!  You Rock!  I'd kiss you through my screen if I could.

I transferred a single employer 401K distribution (in Fidelity) to both a personal Fidelity IRA and a Fidelity Roth IRA.  Most of the portion that went into the Roth IRA was after-tax payments I had made to my employer 401K.  Fidelity only sent me one 1099-R for this transaction instead of separate ones for the rollover to the IRA and Roth IRA.

I would venture this situation is a common occurrence, has driven me nuts today because I knew a small portion of the Roth IRA transfer was taxable (gain in the company 401-K on the after-tax contributions) that was listed in Box 2a.  Therefore, who should I complain to - Fidelity for not sending me separate 1099-Rs, or TurboTax for not asking the right questions that would have automatically told me what you have?  I think I'm going to complain to both entities for the grief this has created.

[dmertz]

Fidelity sending a single Form 1099-R was proper.  The instructions for Form 1099-R allow multiple distributions, or a single distribution sent to multiple destinations, from the same account reportable with the same code to be combined onto a single Form 1099-R.

 It's a TurboTax design choice that requires the Form 1099-R to be split.  Although the user interface could be designed to be able to accommodate all of the possible ways that the amounts could be split, that user interface overly complex for most users.  It's a tradeoff between accommodating the split to different destinations, overburdening the majority of users who do partial rollovers or conversions and having to provide different algorithms for direct rollovers, indirect rollovers, employer plans and IRAs.  If TurboTax was to be modified to be able to accommodate this scenario with the entry of a single Form 1099-R, in addition to asking how much of the distribution was directly rolled over to each type of destination account, TurboTax would have to ask how much of the after-tax basis to allocate to each type of destination account.  There are numerous areas in TurboTax where TurboTax requires splitting of forms to accommodate their entry.

[rsmurano]

I'm in a slightly different boat than the OP. I would like to pull out all my after tax ira contributions and roll this exact amount to a Roth IRA and I would like to keep all the gains from these after tax contributions in the existing ira. For example: if I made $60k after tax contributions to my existing ira for the last 20 years (documented by returns with form 5498 filled out each year), I would like my broker to transfer this $60k into a new Roth IRA and pay no taxes on this amount since this was after tax dollars. Then after 1 year, I have been told that I can cash out this Roth IRA with no penalties or taxes, but any gains from this $60k I would have to leave in the Roth for 5 years. Does this makes sense? Is this legal and would turbo tax allow me to classify this rollover as non-taxed? Thanks

[dmertz]

@rsmurano , what you want to do is not permitted.  The thread that you have posted on discusses rollovers from a qualified retirement plan, not your proposed conversion from an IRA.  Unless you roll the entire pre-tax balance in all of your traditional IRAs over to a 401(k), 403(b), 457(b) or the federal TSP, any distribution from your traditional IRAs, including a Roth conversion, is a proportionate mix of pre-tax money and after-tax money, with the pre-tax portion being taxed.

If you do move your pre-tax money to an employer plan, leaving just the after-tax money in your traditional IRAs which you then convert to Roth, there is no minimum time that the converted amount must remain in the Roth IRA before you can take it out without tax or penalty.  Instead of converting what remained in the traditional IRA, all after-tax money, you could just take a distribution of the pre-tax money from the traditional IRA tax and penalty free.

You also might be confusing the 5-year clock for qualified distributions with the 5-year conversion clock.  The 5-year clock for qualified distributions allows any distribution from your Roth IRA to be tax free as long as you have also reached age 59½.  The 5-year clock for conversions determines when you are about to tax converted funds out tax and penalty free before age 59½, but ceases to apply once you reach age 59½ because at age 59½ distributions are no longer subject to an early-distribution penalty.

[rsmurano]

Dmertz-thanks for the reply. I am retired and have rolled all of my employers 401k accounts into 1 ira, so my only ira contains pre-tax and after tax contributions. My goal is to take all my after tax contributions out to live on now tax free and keep the pre-tax monies and any of the money earned on these after tax contributions in the ira until rmd’s are required. Do you know of any way this can be done? Thanks

[nc cpl]

I'm the OP of this question. I too had a mix of pre and post tax contributions to my IRA and wanted to separate the two. The only way I know of how to accomplish what you want is to do is to roll your IRA pre-tax portion to a 401K (IF the employer allows it which mine does). What your left with is the post-tax or "roth eligible" portion in your IRA, which is then converted (at zero tax because that's been paid) into your Roth IRA.

But...if you're retired, and no longer have an active 401K (that allows "roll ins" from a TIRA) I don't know of any other account that can serve the same purpose as the 401k does to isolate the pre-tax from the post-tax contributions. You can read more on it here:

Isolating IRA Basis For Tax Efficient Roth IRA Conversions

https://www.kitces.com/blog/roth-ira-conversions-iso[product key removed]ver-pro-rate-rule-employer-...

[rsmurano]

Hi there. This doesn’t make sense (I know it’s the irs rules here) because if I roll over all my after tax contributions to a Roth and leave my traditional ira alone which encompasses all my pre-tax contributions (all my work 401k plans have been rolled over to this ira), aren’t we saying the same thing of what the final outcome will be? My broker said they can create a Roth account and they would transfer my after tax contributions to my his new account, and they would create a 1099-r indicating how much they would move to the Roth account and I would state the basis is the same amount that was transferred so there would be no tax. 
I have also read that another way to take these after tax monies out is to take the % of what the after tax contributions are to your pretax amounts and that % will not be taxed on future withdrawals. I just don’t want to wait 10 years not do I have an employer. Thanks

[Critter-3]

If you have a 401K and a ROTH 401K you can roll the 401K into an IRA and the ROTH 401K to a ROTH IRA plain and simple with no issues... the 401K plan administrator will issue 2 1099-R forms for each rollover.

Now if you have a 401K with pre tax and after tax contributions in it  then you cannot ONLY move the after tax contributions out of the account.  It is not normal for a 401K to have after tax contibutions but if it does then you must roll the entire amount of the 401K to the IRA ( the after tax portion will be reported on the form 8606)  and then you can make a ROTH conversion anytime you want however you still cannot only roll the after tax amounts ... each conversion will be a ratio of before and after tax amounts reported on the form 8606. 

[dmertz]

"if I roll over all my after tax contributions to a Roth and leave my traditional ira alone which encompasses all my pre-tax contributions (all my work 401k plans have been rolled over to this ira), aren’t we saying the same thing of what the final outcome will be?"

No.  IRAs and 401(k) plans are subject to different sections of the tax code.  A specific provision of the tax code that permits only pre-tax money to be moved from an IRA to a 401(k) is what allows the separation of pre-tax money from after-tax money in an IRA, otherwise distributions (including Roth conversions) from an IRA are specified by the tax code to be a proportionate mix of the pre-tax and after tax money.

You got bad information from the broker.  Nothing on a Form 1099-R indicates the amount of a regular distribution (including a Roth conversion) that is taxable.  The taxable amount is determined on Form 8606 by performing the pro-rata calculation (which depends on the amount remaining in your traditional IRAs at year-end) to determine the proportionate taxable and nontaxable amounts of the distribution.  The taxable and nontaxable amounts cannot be determined until year-end when the value of your traditional IRAs is known.  Only if the value of your traditional IRAs at year-end is zero will be the case that all of your after-tax money was distributed from your traditional IRAs.

[nc cpl]

I believe dmertz is correct as he knows quite a bit about this. But more simply stated, yes, the end result of your proposed action would get you what you want...the trouble is, The IRS doesn't allow you to do it that way (if they did, I would have gone that route a long time ago). I looked into how to do this (separate pre from post tax contributions so I could roll the after tax into a Roth) for a long time before I stumbled upon the 401K solution. Without a 401K, I don't know of any other way to accomplish this.

[Khaberkorn34]

My 1099R showed the full amount which was being rolled over from a 401k to a traditional IRA.  Check came to me as Fidelity said they couldn't send it directly to the IRA provider.  Check was sent on to the IRA provider and has since been set up.  Code in block 7 is G but it looks like the whole amount is being shown as income when I get down to the total income section.  Am I thinking wrong or is there something else I need to do?