Reverse Rollover from Traditional IRA to Employer 401k + Roth IRA

[scsiguy]

In 2021, I performed a reverse rollover from my Schwab traditional IRA to my employer's 401k plan at Fidelity. The source IRA had a basis of 12k from nontaxable contributions made in 2019 and 2020.

When the funds were received by Fidelity, they informed me that the non-taxable portion of the funds could not be accepted into the 401k plan. Instead, they split the 12k out and deposited them in a new Roth IRA.

Schwab issued a form 1099-R with code G for this rollover.

Fidelity provided a form 5498 showing the 12k as a rollover contribution to the new Roth IRA.

I'm now having difficulty getting TurboTax to emit a correct form 8606. The Easy Step flow doesn't seem to cover this scenario and complains that the 1099-R is miscoded if I indicate that a Roth conversion was involved. Going to the forms and editing the worksheet (the "Rollovers, Roth Conversions, Roth Rollovers, and Recharacterizations" section) for this 1099-R doesn't seem to update the 8606. When I perform overrides of form 8606, I get an error saying that this will prevent e-filing.

I contacted Schwab to ask about the coding for their 1099-R. As the source of funds, since it was a complete distribution for purposes of rollover, they claim their coding is correct. Should I try to get a 1099-R indicating a conversion from Fidelity? Or can I just submit with the overridden 8606 and perhaps add an explanation of this situation somewhere in the return?

[DanaB27]

Yes, you should ask Fidelity if they will issue a 1099-R since they got the funds but then moved part into the Roth IRA.

[dmertz]

This is not anything that Fidelity would correct.  It was your responsibility to make sure that no after-tax basis was rolled over to the 401(k) and roll each portion over separately.

You must file two substitute Forms 1099-R (Forms 4852) in place of the Form 1099-R that you received from Schwab.  One substitute form will have:

Box 1   = amount actually rolled over to the 401(k)

Box 2a = 0

Box 7   = Code G

IRA/SEP/SIMPLE box marked

The other will have:

Box 1   = amount rolled over to the Roth IRA

Box 2a = same as box 1

Box 2b Taxable amount not determined marked

Box 7   = Code 1 if you were under age 59½, code 7 if over age 59½

IRA/SEP/SIMPLE box marked

[samd4225]

 Hi @sciguy 

 I am curious to learn how things worked out with the correction. I am in the exact same boat as you were and the tax pros I have consulted with are confounded with the matter.  Coincidentally,  I did a rollover from schwab to fidelity as well. I have contacted fidelity of my error and it appears they may be hung up too, since I haven't heard from them in two weeks.

Right now fidelity wants proof of what my aftertax/nondeductible funds are.  I explain that Schwab does not track that and I showed them my 8606 but.. still waiting on a response.

Thanks

[samd4225]

@dmertz , do we ask the schwab to do this or by ourselves?

[dmertz]

You create the substitute Forms 1099-R.

[scsiguy]

As others have responded here, I resolved this by filing two substitute 1099-Rs using form 4852. Since I did all of this more than a year ago, I don’t recall the exact flow for doing this in TurboTax 2021, but it was fully supported by the program. My return was accepted via electronic filing and I haven’t heard anything from the IRS.

Here’s some more detail on exactly what I did. There are 3 numbers to keep in mind:

$XXXX.XX = The total distribution from your traditional IRA.

$YYYY.YY  = The nondeductible basis that was included in $XXXX.XX. Fidelity rolled this part into a ROTH IRA.

$ZZZZ.ZZ = The remainder which is subject to tax upon withdrawal. This is the portion that I rolled into my employer’s traditional 401k plan ($XXXX.XX - $YYYY.YY).

The first corrected 1099-R has a gross distribution of $ZZZZ.ZZ, 0 for the taxable amount, and uses distribution code G. You also have to explain how this value was determined (form 4852 line 9) and the efforts you took to get the 1099-R corrected (form 4852 line 10).

For line 9, I said:

The $ZZZZ.ZZ reported on this 1099-R is the taxable portion of a total distribution from a traditional IRA to an employer sponsored 401k. Upon receiving the funds, the target institution notified me that they could not accept the nondecutable contribution portion of the IRA distribution into the employer sponsored 401k. They instead split out the $YYYY.YY basis into a separate ROTH IRA. The value reported here is therefore $YYYY.YY less than what was the original value reported by Charles Schwab ($XXXX.XX).

For line 10, I said:

I contacted both Charles Schwab and Fidelity (the target of the rollover) but both indicated that it was the other institution's responsibility to issue a correction. This left me no other option but to submit substitute 1099-R forms.

The second 1099 has a gross distribution of $YYYY.YY, leaves taxable amount blank, has “Taxable amount not determined” checked, and uses distribution code 2. I also checked “Total distribution” as this was the final distribution from the account. I was following the guidance for ROTH conversions in the instructions for form 1099-R.

For line 9, I said:

The $YYYY.YY reported on this 1099-R is the nondeductable contribution portion of a total distribution from a traditional IRA to an employer sponsored 401k. Upon receiving the funds, the target institution notified me that they could not accept the nondecutable contribution portion of the IRA distribution into the employer sponsored 401k. They instead split out the $YYYY.YY basis into a separate ROTH IRA. The value reported here is therefore the $YYYY.YY delta between what I reported on the code G substitute 1099-R ($ZZZZ.ZZ) included in this return, and the original value reported by Charles Schwab ($XXXX.XX).

I used the same text for line 10 as in the first 1099-R.

Hope that helps.