Retirement RMD and Roth conversion

[mommamarty]

I have been taking RMD for a few years.  This year I only took 1/2 as a normal distribution.  Because I didn't need the money, I took the balance of the required amount, plus a little bit more, and converted it to my Roth.  Taxes are withheld from the withdrawals.  Turbo Tax is checking my entry and says "partial Roth conversion amount cannot be greater than the amount on line B1......."  Line B1 is a check box - no dollar amount is identified.  I have put the part that was converted on B2 and the same number appears in B6 in red and I get an error message.  How do I proceed?

[DanaB27]

Please be aware that you can only convert the amount of the distribution. If you added extra money to the Roth IRA then this will be a contribution.

Please follow these steps to enter the 1099-R and conversion:

1. Click on the Search box on the top and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
5. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"(only up to the distribution amount)

To enter the additional Roth contribution:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”

Please be aware the total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

[mommamarty]

I thought you could convert the whole IRA if you wanted to - you would just have to pay the big tax bill.  How can I identify the extra money (over the amount of the distribution) as a contribution when I am no longer working and have no earned income.  I thought contributions were dependent on earned income.

[DanaB27]

Yes, if you get the whole traditional IRA distributed then you can convert the whole amount. But you cannot add extra money to the conversion.

If you did not have earned income then you will have to withdraw the extra money plus earnings by the due date of your return because otherwise you will get a 6% penalty tax on the excess contribution. You will need to inform your bank that you want to remove the excess contribution amount plus earnings.

You will get a 1099-R 2021 in 2022 with codes P and J for the withdraw of excess contributions and earnings. This 1099-R will have to be included on your 2020 tax return and you have two options: 

• You can wait until you receive the 1099-R  2021 in 2022 and amend your 2020 return or
• You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

1. Open your return
2. Click on "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2 enter the earnings
7. Box 7 enter P and J 
8. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

[mommamarty]

My current 2020 1099-R has federal tax withheld in box 4 and state tax withheld in box 14 so I assume I cannot create my own 1099-R per your bullet point #2.  So sounds like I need to:

1.  Call my bank and have the extra converted amount distributed to me and

2.  Wait until I receive 1099-R for 2021 and then amend my 2020 tax return.

Is this correct?

[DanaB27]

Yes, if you do not currently want to create a 1099-R for the withdraw of excess contribution plus earning or are unsure about all the details then all you have to do is:

1. Call you bank and have the extra converted amount plus earnings distributed to you 
2.  Wait until you receive 1099-R for 2021 and then amend my 2020 tax return.

Please do not forget to correct your entry of your 1099-R about how much you converted.

[mcle3wi2000]

I took my RMD early in 2020 and paid Federal and State Taxes on the distribution.  After the Care Act, I returned the RMD back to the IRA and converted the same amount to my Roth IRA.  Since taxes were already paid on the RMD I did not apply for any refund and just left them alone.  

When I got my 1099-R from the bank, I tried to enter it into Turbo Tax Premier with the above data and got a message back that  could not do this with one 1099-R.  I would have to delete the 1099-R from the bank and enter two new RMD's manually (the back refuses to issue new 1099-R's)  I deleted the bank's 1099-R, added two new 1099-R's and added an explanation as to what happened.  I expect this is going to trigger a letter from the IRS and/or other problems.  Is Turbo Tax going to update the software to handle this or is there another solution?

Thanks

mclewi2000