Traditional IRA conversion to Roth IRA

[Tiger88]

I am 68, retired with no regular income and have both a traditional IRA and Roth IRA.  My financial adviser recommended converting a portion of my traditional IRA to my Roth IRA since my tax bracket is modest.  In November 2019, I converted $90K from my IRA to my Roth IRA.  My subsequent brokerage statement reflects a conversion and not a distribution.  However, Merrill-Lynch generated a 1099-R which reflects a 'distribution' vs. a conversion.  A M-L representative indicated that they will send a Form 5948 with the IRS in May, 2020 to support the conversion element of the transaction.

While performing the input to Turbo Tax for my 2019 returns, the software is telling me that I was not eligible for the $90K 'contribution and that a 6% penalty will be charged annually until the excess component is reversed/returned to the traditional IRA account.  I paid $22K to the IRS and $11K to CA Franchise Tax Board for withholding related to the $90K conversion.  Backing out a portion of the 'conversion' reduces the amount of Roth account accordingly plus I take a hard loss to sell securities at a now reduced price due to Corona virus related market volatility.

What is the Turbo Tax work around to 'remove' the penalty element and possibly maintain the $90K rise in my Roth IRA account?   Does Intuit provide a CPA to walk me through the steps to complete and file my 2019 tax returns?

[fanfare]

there is no contribution involved in what you did.

If you're entering the 90K as a contribution to your Roth, that's wrong.

[Tiger88]

Thank you for your prompt reply.

The 1099-R reported to the IRS reflects a $90K distribution.  IF check the box in Turbo Tax that the amount was converted to a Roth IRA, an excess contribution to my Roth IRA results plus a 6% penalty.  The subsequent reporting on form 5948 to the IRS after my return is filed would appear to require an amended return to recover any penalties.  I would likely have to liquidate the excess 'contribution' (at a loss due to market decline since November) to cure the excess amount issue.

The alternative is to NOT check the box that the $90K was converted to a Roth IRA.  The subsequent form 5948 may take care of the conversion penalty and other matters.  It is my understanding that since I am declaring the $90K as a taxable event that the conversion is not subject to an 'excess' calculation.

What do you recommend for corrective action? 

[fanfare]

1) don't file an incorrect return; don't file a return that shows a contribution penalty when you did not make a contribution.

2) form 5498 is not going to correct at the IRS errors on your filed return.

3) "IF check the box in Turbo Tax that the amount was converted to a Roth IRA, an excess contribution to my Roth IRA results plus a 6% penalty."

I don't see how this can happen. I'm looking at TurboTax 2018 and it does not happen when I tried your scenario just to be sure.

What is the amount of the "Excess contribution"?

Maybe you have an unresolved excess contribution from a previous year.

[fanfare]

If you leave the box unchecked and your return is then correct (no penalty), you can file it as long as you don't have any basis in Traditional IRAs.

It doesn't matter that you converted the distribution to a Roth as far as the IRS is concerned.

Keep your own tax records documenting what you did for future reference.

[dmertz · Accepted solution]

A Roth conversion is defined as a distribution from the traditional IRA and a conversion contribution to the Roth IRA.  The Form 5498 should show the conversion contribution in box 3, not a regular contribution in box 1 and will match up properly with the distribution reported on the Form 1099-R.  Enter this in TurboTax only by entering the Form 1099-R and indicating that you converted the money to Roth.  Do not enter anything regarding this under Deductions & Credits.

[VolvoGirl]

Sounds like your entered the 1099R but also entered it under Deductions as a new contribution to the ROTH.  Didn't see you checked or answered that.  Do not enter it under Deductions.  If you did, delete it.  Only enter the 1099R.  What code is in box 7?

[Tiger88]

Thank you!  Mystery solved!  Correcting the input to remove the Roth contribution rendered a swing of approximately $5K and a refunds vs. a payment.  You deserve a gold star

[Tiger88]

You are correct.  Box 7 was marked as IRA/SEP/Simple.  I removed the Contribution line item and my return reflects a refund vs. a payment.  Returns are ready to file.  Thank you for your input!  You deserve a gold star!

[fanfare]

All I have to say is, "aaargh !".