Reverse Rollover from Traditional IRA to Solo 401K

[Btang65]

Executing a mega backdoor conversion.  Successfully rolled the Traditional IRA taxed basis to my Roth IRA, received a 1099-R with Distribution Code 2, entered into turbotax with no issues.

Part two was the reverse rollover of the untaxed portion of my Traditional IRA to my Solo 401K.  Received a 1099-R from Vanguard properly indicating the gross distribution and line 2a taxable amount as $0, line 7 Code G, IRA/SEP/SIMPLE checked.  This all appears correct.  The problem begins when I enter into turbotax.  The first menu question is:  Did you move the money to a Roth IRA?  Choices are:  Yes, this money was rolled over to a Roth IRA or No, I didn't.  Since I rolled the money into a 401K, I selected No. 

Then a screen pops up saying:  "Double check Box 7 and the IRA box on your 1099-R.   You indicated that you converted a traditional IRA to a Roth IRA with Code G in Box 7.  However, if this is true it should have Code 1, 2, or 7 instead."

So I have an impossible situation.  Turbotax is saying that Code G specifies it is rolling into a Roth (incorrectly I believe since G I believe actually indicates it is going into any qualified plan).  But the menus do not allow me to choose a 401K destination.

It then mentions double checking if everything was entered correctly and contacting the provider.  

At the very bottom, there is a "This is correct" button.  I clicked it and previewed my 1040 lines and it appears that it showed up properly in 4a (gross amount) and 4b ($0).

Any thoughts?  Is it logical to just leave it like this since the 1040 seems correct?

Thank you very much.

[JohnB5677 · Accepted solution]

Yes, It sounds like your return is correct.  I suggest you run Federal Review and confirm there are no discrepancies in the posting.  I have seen that pop-up regarding the Code G, but it posted correctly when I simply worked through it.

• Code G – Direct rollover of a distribution to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA

[dmertz · Accepted solution]

Ignore online TurboTax's bogus message about the code G Form 1099-R with the IRA/SEP/SIMPLE box marked as having anything to do with a Roth IRA.  It's due to a bug in online TurboTax.

[Btang65]

Thank you very much for the perfect and quick answer!

[Btang65]

The federal review shows zero taxable amount.  Thank you very much!

[Btang65]

Follow-up question:  As I previously stated, when I entered the 1099-R for the Traditional IRA taxed basis rollover into the Roth IRA, everything looked OK.  But looking further, I see a potential problem with this part as well.  When I review my finalized tax forms, on the 8606 there are no entries for lines 5 thru 13, and no entries for Part II lines 16-18.  It seems that the Roth rollover should have populated these lines.  I do realize that these would not generate any taxable amount, but I have a concern that having these blank could trigger some issue for future years regarding tracking the basis which is now zero.  I believe that I can just force a zero in the tracked basis next year if that is an acceptable practice.

Thank you.

[dmertz · Accepted solution]

For the code-2 Form 1099-R reporting the conversion from the traditional IRA to the Roth IRA, make sure that the IRA/SEP/SIMPLE box is marked.  If it's not marked, TurboTax will treat it as a rollover from the 401(k) and not populate Form 8606 Part II.  That Form 1099-R should also have box 2a equal to box 1 and box 2b Taxable amount not determined marked.  (If the form provided by the payer is not prepared this way, it would seem to imply that the distribution came from an account that was not an IRA.)

[Btang65]

I double checked each of the items you noted, both on the 1099-R and as entered in TurboTax.  2a amount equals line 1, distribution code is 2, taxable not determined and IRA/SEP/SIMPLE are marked.  Note that 2b Total distribution is also marked.

I hope there is a solution to this, but in the event that I can not, would it be an acceptable answer to mail the forms and include an 8606 with the missing lines completed?

Thank you very much.  

[dmertz · Accepted solution]

I'm unable to reproduce the symptom where TurboTax fails to complete Form 8606 Part II for the entry of a Form 1099-R that has code 2 in box 7, the IRA/SEP/SIMPLE box marked and you indicate that any part of the distribution was converted to Roth.  I suggest deleting and reentering the code-2 Form 1099-R.

[Btang65]

Yes, that worked, part II filled in and line 13 and 14 now correctly show the non-taxable distribution, and the basis for 2021 and previous years now correctly shows zero.  

It seemed everything was entered correctly, and that was an excellent idea to re-enter.  You are a true expert on this topic and thank you so much!

[Btang65]

I have one more (hopefully last) follow-up question.  My third major re-alignment of my retirement accounts was a source specific rollover from my 401K to my Solo 401K and Solo Roth 401K.

I received one 1099-R which was for the combined After Tax 401K contributions and the earnings on the After Tax 401K contributions.  The Gross distribution is correct, and box 5 Employee contrib/desig Roth contrib or insurance premiums  contains the proper value of my after tax contributions, excluding the earnings on those contributions.  2a Taxable Amount = 0, Distribution code G, IRA/SEP/SIMPLE not checked.

My problem is that when I enter the 1099-R in TurboTax, I get the question:  Did you move this money from a 401(k) to a Roth 401(k)?  

There is no option for my situation of rolling part to a Solo 401K and part to a Solo Roth 401K. 

The Federal Review properly shows that there is no taxable income from this 1099-R. 

My question:  Is it OK to just leave it like this in TurboTax?  Would it be a viable option to break this 1099-R into two individual 1099-Rs for the portions going to Solo Roth 401K and Solo 401K?

Thank you very much.

[dmertz · Accepted solution]

Generally, because the rollover was split between two different destinations, you would need to split the Form 1099-R for entry into TurboTax, one for the portion rolled over to the traditional account in the Solo 401(k) and the other for the portion rolled over to the designated Roth.  However, it's impermissible to roll any distribution from a traditional account in a 401(k) over to a designated Roth account in a different 401(k).  (See IRS Notice 2020-62 which explicitly states this.)  If you choose to ignore that, you would just split the Form 1099-R as I mentioned, but there is always the remote chance that the IRS will detect the error and that could potentially disqualify your Solo 401(k).

What you should have done is to roll the pre-tax portion over to your Solo 401(k) and roll the after-tax portion over to a Roth IRA, not to the designated Roth account in your Solo 401(k).  A rollover of the after-tax portion to a Roth IRA is perfectly permissible.  In that case the code-G Form 1099-R would be the same and you would need to split it with one showing the pre-tax portion that went to the Solo 401(k) and the other for the after-tax portion that went to the Roth IRA.

[JWL2672a]

Love OP's question.  I thought I was the only one with such an obscure question.  So my goal this year was to be able to contribute to an IRA.  But my income limits that.  Enter the backdoor Traditional IRA to Roth IRA rollover plan.  However, the hitch in this plan is that if you have any additional traditional IRA funds, the rolled over amount is allowed only pro-rata.  The amount rolled over is divided by whatever your total traditional IRA balance is, limiting the amount you can roll over.

So I needed to empty my traditional IRA.  I created a solo 401(k) (with my wife's LLC), did the reverse rollover that OP was talking about (traditional IRA to traditional solo 401(k), and voila, empty traditional IRA account!

Man, I wish the IRS would stop penalizing responsible people who want to save.