401K rollover to Roth and Traditional IRA

[YuanG]

I have a 401k plan that allows for after-tax contribution and rollover to IRA, both Roth and traditional.  I was under the impression that if I rolled my after-tax contributions to Roth, and any earnings associated with it to a traditional IRA, then the whole thing does not trigger a taxable event.  However, Turbo tax is saying I own tax for the portion that's rolled into the traditional IRA, or more accurately, it is not giving me a chance to enter the fact that the "earnings" has been rolled directly into a traditional IRA.  Any ideas to what to do here?  Many thanks!

[dmertz]

In TurboTax you must split the single Form 1099-R for the distribution from the 401(k) into two, one for the portion rolled over to the Roth IRA and the other for the portion rolled over to the traditional IRA such that the dollar amounts on the two split forms sum to the same amount as is in the corresponding box on the original.  You'll put the box 5 amount on the Form 1099-R that corresponds to the rollover to the Roth IRA.

[KarenM90]

If your 401k was all pretax funds, whatever is rolled over into a Roth will be taxable.

However, if your 401k included After-Tax Contributions as well as Pre-Tax Contributions, you can do a direct rollover but some portion of the rollover may be taxable.  (If you are taking a partial distribution, a "pro-rata" rule applies, so a portion of the distribution will be allocated as After Tax and a portion will be  allocated as Pre Tax funds.)

The 1099R you received should specify the taxable and nontaxable amounts as well as the portion of your contributions (usually in Box 5) that came from after tax funds.

If the 1099R does not indicate your distribution as a Rollover, (code G in Box 7) you will need to let TurboTax know what portion of the distribution went to a Roth.

Here is what it will look like in TurboTax:

• Log into your TurboTax return
• Click on Federal Taxes
• Click on Wages and Income
• Scroll to Retirement Plans and Social Security
• Click on the button beside IRA, 401(k), Pension Plan Withdrawals (1099-R) 
• You will be asked if you have any of the types of retirement income listed – you will need to answer yes

Go on through the next couple of screens entering your information.  When you get to “Enter your 1099-R”, you will enter all the information exactly as it is reported on your Form 1099-R. 

• When you get to the screen titled "What Did You Do With The Money from (Name of Broker)?" Indicate that you moved the money to another retirement account (or returned it to the same retirement account).
• Then indicated you did a combination of rolling over, converting or cashing out the money.
• And how much you rolled over to another (or back to the same) retirement account. 
• Answer a couple more questions and you will be done!

[wolfml]

@dmertz - If the PC version of TT is being used I believe that it is possible to correct TT's default inability to split the distribution.  First, enter the entire amount and indicate that it is going to a Roth IRA.  Then open the 2019 TT form for the applicable 1099-R, go to the Rollovers section of the Additional Distribution Information page, uncheck Box B5 and in field B6 change the amount to be the amount actually rolled into the Roth.  This approach appears to produce the correct result; do you see any issues with it?  I do have to use the trick of splitting a 1099 into 2 1099s for TT in other cases (for example, to properly allocate discount/premium adjustments to interest income); it is quite frustrating that TT will occasionally produce incorrect results even if you answer all of its questions correctly.

[dmertz]

Doing so will produce the correct result on your tax return with respect to this transaction but will not produce the correct result for your Roth conversion basis on the IRA Information Worksheet and could result in an incorrect result on Form 8606 Part III if you also received nonqualified distributions from a Roth IRA.

Only by splitting the Form 1099-R will TurboTax handle everything properly.

[wolfml]

@dmertz - I was concerned about that, so I had already tried the split 1099 approach and it it resulted in the exact same result on Form 8606 Part II as my approach (my situation does not involve Form 8606 Part III).  I believe that no impact on Form 8606 is correct because Form 8606 Part II is only used for conversions from IRAs (conversions from 401(k)s are not reported in Part II) and Part III line 24 includes rollovers from 401(k)s in addition to amounts previously reported as basis on Form 8606.

[dmertz]

Using your method, Form 8606 line 24 will be incorrect if Part III is needed now or in the future because the amount on line 36 of the IRA Information Worksheet in 2019 TurboTax will be incorrect.

[wolfml]

@dmertz - Indeed it will be.  I had compared the 2019 returns produced using both methods, and they were identical.  I had not checked for differences in TT carryforward amounts.  Thanks for your help in sorting this issue out.  It is frustrating that in so many cases one knows what the tax return and carryforward amounts should be, but has to trick TT to get it correct in TT.

[CraftyGram47]

We have this problem with a rollover from a 401k that had a portion that was after tax and a portion that is pre  tax. Trying to follow your instructions I find that my turbo tax does not have the button for pension plan withdrawals. I have to click on the particular I099-R to edit it.

First thing it asks is if the money rolled over into a designated Roth 401(k) or 403(b) account. They did not. Part rolled over into a ROTH IRA and part into a traditional IRA. Next it asks if the money was rolled into a ROTH IRA account. Only part of the money rolled over into a ROTH, but if I select the yes. It asks if after tax contributions were made it asks how much is the after tax contribution. There is no place to indicate that the rest rolled over into a traditional IRA (so it is assuming the rest is income)

[CraftyGram47]

I have this problem, too. A 401k contained both pre tax and after tax funds, so was rolled over into two accounts, an IRA and a ROTH IRA.

So, you're saying I need to pretend I have two forms. One is the part of the 401k that rolled over into an IRA, and one is the part that rolled into a ROTH IRA? That will not raise any flags with the IRS?

[JS7259]

same here. I have the same issues. plus Broker send my after Tax 401k rollover to traditional IRA first  and then roll the traditional IRA with after Tax money to  a new ROTH contributory account for me . It should be done directly to Rollover ROTH IRA. Now I got a 1099-R from my broker and Box 2 is listed as taxable . The 1099-R from 401k management company also send me one  1099-R and the after Tax portion is listed on Box 5.

My spouse also did the same 401k rollout to IRA/ROTH IRA and did nor get any 1099-R from the Broker because the after Tax portionwas done  with direct rollover to ROTH IRA.

Thanks in advance for any advice or suggestions.

[John2022]

I too was wondering if creating two 1099s from one would be a red flag for the IRS.     I guess it boils down to the question of what TurboTax presents to the IRS when you file.    Does anyone have any new information on this question?

[dmertz]

As long as that totals are correct, the IRS Automated Underreporter System will not flag the tax return for examination.  Also, with no tax withholding TurboTax does not include the details of your Form 1099-R entries in your e-filing, so the IRS will not know that you split the 1099-R to accommodate TurboTax.

[Christing123]

When you split the 1099-R, did you choose "I need to prepare a substitute 1099-R" checkbox at the step "Tell Us Which 1099-R You Have"?  See attached.

[dmertz]

It would be inappropriate to prepare a substitute Form 1099-R (Form 4852);  the payer has not failed to provide the Form 1099-R and it is not incorrect.  Preparing a substitute Form 1099-R would also preclude e-filing.