401K MRD to Roth COnversion

[perk618]

Approximate numbers --- I took an $80K as my 401K distribution, but was then advised by my broker that moving the $80 to a Roth Account was a better idea. He moved the money within the specified period, opening a Roth for me. My 1099-R now shows a distribution of $180K with taxes withheld of $20K. TurboTax now shows I owe roughly $40K additional taxes on this total distribution.

How do I show that $80K of the $180K was moved to the Roth Account as I don’t see where to enter it in the 1099-R section of the form

[VolvoGirl]

In the first place you can't convert a RMD to another account.  You have to take a distribution for it.  Then you can convert or transfer the amount over the RMD.

But if you convert to a ROTH it will still all be taxable.  How much was your RMD?  You mentioned both 80k and 180k.  

Converting to a ROTH takes it out of the tax deferred account and puts it into an after tax account where it grows tax free.  You pay all the taxes on it when you convert it.  Might have been a bad move.  @dmertz 

[macuser_22]

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@perk618 wrote:

Approximate numbers --- I took an $80K as my 401K distribution, but was then advised by my broker that moving the $80 to a Roth Account was a better idea. He moved the money within the specified period, opening a Roth for me. My 1099-R now shows a distribution of $180K with taxes withheld of $20K. TurboTax now shows I owe roughly $40K additional taxes on this total distribution.

How do I show that $80K of the $180K was moved to the Roth Account as I don’t see where to enter it in the 1099-R section of the form

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Two issues here:

First the title of your post.  You said "401(k) RMD".   If you are 70 1/2 or older and were required to take a 401(k) RMD then that is NOT eligible to be rolled into ANY other retirement account.  If it was then  it would be an excess contribution  to that retirement account subject to penalized until moved and the failure to take the RMD is also subject to a 50% of the RMD penalty.

If this was not a RMD or only 401(k) money that exceeded the RMD amount was rolled (converted) to a Roth IRA then the conversion amount is taxable as ordinary income.  The tax withheld in box 4 will be added to all other W-2 and 1099 withholding on the 1040 line 17 to offset any tax liability that you have.

[macuser_22]

BTW:   $20K is only 11% of $180K so the actual tax at your margional tax rate is probably much higher than that.  If you are in the 24% bracket then you should have had about $43K withheld or you will have to pay from other funds.

Assuming that you took a distribution of $180K and $80K was the RMD and $100K was converted to a Roth then enter it as follows:

When asked about the RMD, enter the amount taken as a RMD.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR  Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

If this was a rollover or conversion, answer the question that you moved the money to another retirement account (can be the same account). The screen will open up with choices of where it was moved.  Then choose that you did a combination  of things.  Enter the $100K that was converted to a Roth in the bottom box ans leave the top box blank.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

It will show as income on the summary screen which shows gross income, not taxable income.

[perk618]

I'm 75 and my MRD for 2019 was $21K but I decided to increase that to $100K, ( $80K stock, $20K taxes). which I transferred as Stock to my standard stock account. The broker reversed the transaction, advising that opening a Roth was a better move as I didn't need to cash out. I expected therefore to see a 1099-R with $100K withdrawn and $20K taxes paid, but the 1099 showed $100K as Normal Distribution with $20K taxes taken plus a Roth Conversion of $80K for a total distribution of  $180K

Entering the Gross Distribution as $180K shows that I owe almost $40K additional taxes, but I only took $100K distribution on which I paid $20K tax, How do I show that all I did was roll the initial $100K back into my IRA and then move it to the ROTH

[macuser_22]

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@perk618 wrote:

I'm 75 and my MRD for 2019 was $21K but I decided to increase that to $100K, ( $80K stock, $20K taxes). which I transferred as Stock to my standard stock account. The broker reversed the transaction, advising that opening a Roth was a better move as I didn't need to cash out. I expected therefore to see a 1099-R with $100K withdrawn and $20K taxes paid, but the 1099 showed $100K as Normal Distribution with $20K taxes taken plus a Roth Conversion of $80K for a total distribution of  $180K

Entering the Gross Distribution as $180K shows that I owe almost $40K additional taxes, but I only took $100K distribution on which I paid $20K tax, How do I show that all I did was roll the initial $100K back into my IRA and then move it to the ROTH

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There is something basically wrong here.

If your RMD was 21K then that must be removed form the 401(k) as cash or put into a brokerage account - not an IRA.   If you took an additional $80K out of the 401(k) , You should have an 1099-R issued by the 401(k) plan administrator for the total of $100K.   That 1099-R should have a code 7 in box since it  could not be a trustee-to-trustee rollover if part of it was a RMD.

If you took advantage of the 60 day rollover provision to convert the $80K that was not a RMD to a Roth IRA then you would enter as I showed above and enter the $80K in the bottom box.  This assumes that no more then 60 days elapsed form the say if the $100K distribution  to the day the $80K money was in the Roth IRA.  The fact that the $80K was "parked" in a standard brokerage account for a short time does not enter into a 60 day rollover - the $8K could have just been a check in your pocket.

If you only have a single 1099-R and that was issued by the 401(k) plan administrator for $180K then something is missing from your description.   The 401(k) administrator has nothing to do with what happens after the distribution.

[dmertz]

Since $20k was withheld for taxes, if this was just the 20% mandatory withholding on amounts eligible for rollover, this would be consistent with a total distribution of $180k, with $80k being RMD, $100k being converted to Roth and $20k of the $80k RMD being withheld for taxes on the $100k conversion.  With the entire $180k being taxable, $60k of marginal federal tax liability on $180k indicates a marginal tax rate of 33%, which doesn't seem particularly odd for someone who is subject to an $80k RMD (suggesting a relatively wealthy individual who could easily have enough income to be subject to that marginal tax rate).  But this is just a guess.

[Edit] I'm not sure how I would explain only $20k being withheld if only $21k was RMD.  If the rollover to the Roth IRA was a direct rollover, that should have been reported on a code G Form 1099-R separate from the code 7 Form 1099-R that included the distribution of the RMD.

[macuser_22]

@dmertz - To me that still does not add up.  I thought the mandatory 20% withholding was on the entire box 1 amount.  If that was $180K then 20% would have been $36K.   $20 K withholding is consistent with $100K distribution with $21K as the RMD as the poster said and the remainder going to the Roth so I still do not understand where the other $80K came from and if it is on the 1099-R form the 401(k) plan or something else.

[dmertz]

The mandatory 20% withholding is only on the amount eligible for rollover, so if $80k had been the RMD and the $180k was all reported on a code 7 Form 1099-R, only 20% of $100 would be required to be withheld.  But you are right, with only $21k being RMD it doesn't add up.

[macuser_22]

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To me, a taxable distribution  is the box 1 amount even it is contains a RMD (that is also taxable) and there is  not a code G - that would not have any withholding.

I'm just going by what the IRS says:

Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later. If the distribution is rolled over, and you want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have your 401(k) plan transfer a distribution directly to another eligible plan or to an IRA.  Under this option, no taxes are withheld.

[perk618 · Accepted solution]

Thank you for your insight into this issue. My broker was able to split the Items so that although the $180K was shown on my 1099, splitting the item into 2 1099's in placing the $100K ( $80K total withdrawal 20K taxes ) by showing the $21K which was the MRD and then having a second 1099 which showed the $80K going  into a ROTH account, it brought the amount of tax due into manageable proportions. I don't believe I would have been able to do this without having your input which was the guidance that allowed my broker to see the way though to problem. Thanks again  to all who provided guidance