IRA to Roth on two 1099-Rs

[Haribo]

Hello!  Not a tax pro here, but I do my sister's taxes.  She received two 1099-Rs for her conversion from a traditional IRA to a ROTH that her financial advisor recommended that she do.  She got one 1099 with no taxes withheld.  And a 2nd 1099 that is wholly taxes in that the amount withheld for state and federal equal the total on line 1 Gross Distribution.  When I enter it seems to me that she is owing WAY more than she should so I feel like I'm doing it wrong.  I entered the two 1099s on TT under 1099-R entries.  

Under what did you do with this money, I clicked "moved the money".  And "did a combo of rolling over..." then I entered the amount converted to the ROTH account.  I did that for both 1099-Rs.  I entered them the both the same way.  

Am I handling this correctly???  She's never ever owed taxes in her life and she is almost to retirement age.  So I think I may be entering wrong.  Thoughts???  Thank you in advance!

[ColeenD3]

You can check your form to see if one is marked corrected and/or check with your financial advisor.

This may be a  Backdoor Roth.

A backdoor Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA. Contributing directly to a Roth IRA is restricted if your income is beyond certain limits, but there are no income limits for conversions.

You’ll receive a Form 1099-R with code 2 in box 7 (or code 7 if you’re over 59 ½) in the year you make your Roth conversion. You should report your conversion for the year you receive this 1099-R:

• If you received this form in 2021, complete both steps below to report it on your 2021 taxes
• If you'll receive this form in 2022, wait to report it on your 2022 taxes. In this case, only complete Step 1 below for your 2021 taxes. You’ll complete both steps next year when filing your taxes for 2022

Doing a backdoor Roth conversion is a two-step process.

[Edited 4/16/2022|6:07 AM PST]

[dmertz]

What happened is that your sister was under age 59½ and took a distribution to be withheld for taxes in addition to the amount that was converted to Roth.  The amount converted to Roth is reported with code 2 because Roth conversions are not subject to an early-distribution penalty.  However, the portion withheld for taxes is reported with code 1 to indicate that it is subject to an early-distribution penalty unless other funds are substituted to complete a rollover or conversion of this portion.

For the code 2 Form 1099-R, indicate that it was moved to another retirement account, that she did a combination of rolling over, converting and cashing out, then indicate that the entire amount was converted to Roth.  Form the code 1 From 1099-R, indicate that it was cashed out unless other funds were substituted to roll over or convert this portion.

Your sister's financial advisor didn't do your sister any favors.  Someone under age 59½ using a distribution from a retirement account to pay the taxes on a Roth conversion is generally a bad idea.  It's much easier to decline tax withholding on the distribution being converted, convert the entire amount distributed, then make an estimated tax payment or increase withholding from other sources to avoid a tax underpayment penalty.  By using other funds to pay the taxes, the early distribution penalty is avoided and more money makes it into the Roth IRA to grow eventually tax-free.

[scgavan4988]

DMertz, unfortunately, I found myself in this exact same situation in 2024 and tried to convince my financial advisor that it was handled improperly by Schwab because they were likely instructed to do so.  Nevertheless, can you advise me as to how to answer the TT question regarding the funds listed on the 2nd 1099-R which are the federal and state taxes?  The question regarding what I did with the money, rollover, convert, combo rollover and conversion vs none of the above.  I am guessing it is "none of the above" and taxes or penalty will apply.

Catherine G

[dmertz]

If you did not substitute other funds to complete a rollover or Roth conversion of the tax withholding that was reported with code 1, the amount reported with code 1 is and amount cashed out, subject to tax and early-distribution penalty.  In that case, "none of the above" would be correct.