Rollover/Recharacterization 403b to traditional IRA to Roth IRA question

[BE2]

Good afternoon: 

I need assistance in how to place my situation in TurboTax: I believe I may be inputting something wrong since it shows that I have a penalty since I made a contribution of $21K to my Roth IRA when in fact $17.5K was a rollover (although TurboTax seems to call it a recharacterization) and $3.5K was the only contribution. 

Situation: 

-moved to a new job in 2022

-had a 403b in my prior job containing $21K 

-in 11/2022, $17.5K was transferred into a traditional IRA which was then transferred to an already existing Roth IRA 

-in 11/2022: $3.5K was directly transferred from the 403b into the same already existing Roth IRA

-I have a 1099-R form containing the $17.5K 

I believe that the problem is in one of these areas: 

-I am placing the 1099-R in the "Wages & Income" section, but also selected that I own or will contribute to both a Traditional IRA and Roth IRA 

-I stated that I did contribute to a traditional IRA ($17.5K) and this amount was recharacterized into a Roth IRA 

-I placed $0 in the "value of my traditional IRA in 12/31/2022"

-I placed $3.5K as a Roth IRA contribution

Thanks for your assistance. 

[dmertz]

TurboTax does not call a rollover a recharacterization.  If TurboTax says anything about a recharacterization (or "switching" a contribution), you 've either entered something incorrectly or the financial institution is reporting a recharacterization (code N or R in box 7 of the Form 1099-R).

"-I have a 1099-R form containing the $17.5K "

What about the Form 1099-R with $3.5k in box 1?  If a total of $21k came out of your 403(b), you must have Forms 1099-R with box-1 amounts that total $21k.

Unless the $3.5k was an RMD, it makes no sense that you would report the $3.5k as a distribution paid to you and you subsequently used the cash to make a Roth IRA contribution that was otherwise independent of the distribution from the 403(b).  This would instead be a rollover, possibly (perhaps even probably) taxable, to the Roth IRA, not a new Roth IRA contribution.

You also made no new regular contribution to the traditional IRA.  It's extremely likely that nothing about this should be entered under Deductions & Credits.

You should have either two or three Forms 1099-R, one or two from the 403(b) totaling $21k and one from the traditional IRA for $17.5k.  What are the codes in each of these Forms 1099-R?

[BE2]

Thank you for the information. Very helpful!

A few updates: 

1) Rollover vs recharacterization

- Turbotax has these conflicting statements as definitions (verbatim): 

"When using Turbotax, a transfer of funds form a traditional IRA to a Roth IRA or from a Roth IRA to a traditional IRA is not considered a rollover" 

"[Recharacterizing" means that you first contributed money to a traditional IRA, but then later moved your money to a Roth IRA."

-Is there something that I'm misunderstanding?

2) Form 1099-R 

- I don't have a form 1099-R for the $3.5K: I will ask my two institutions (403b and Roth IRA) about this 

-My 1099-R for the $17.5K does have "2" in box 7 with "IRA/SEP/SIMPLE" checked 

-If both the institutions give me 1099-R forms with the same amount (i.e. two 1099-R forms from each institution with both containing the $17.5K) do I include both in my return?

3) $3.5K as RMD 

-Your description as a rollover is what occurred: I will update this on the Deductions and Credits (D&C) section

4) Regular contribution in traditional IRA 

-Understood. Since I had contributed to the traditional IRA as part of the transfer process I thought I had to place it in the D&C  section. I will remove this from the D&C section 

I will send updates when I receive more. 

[dmertz]

1)  Out of context, that TurboTax statement is misleading.  That statement only applies to new traditional or Roth IRA contributions that are entered under Deductions & Credits, which these are not.  The money was deposited into the traditional IRA as a rollover, not as a new contribution.  Moving the $17.5k from the traditional IRA to a Roth IRA is a Roth conversion and is reflected on the code-2 Form 1099-R.

2)  The $3.5k as well as the $17.5k that came out of the 403(b) are required to have been reported on a Form 1099-R, so you need to track that down with the 403(b) plan (not the Roth IRA custodian).  If these were directly rolled over to the respective traditional and Roth IRAs, which seems to be the case because nothing was withheld for taxes, these would likely be combined on a single code-G 2022 Form 1099-R from the 403(b) showing a gross distribution of $21k.  Unfortunately, TurboTax cannot directly accommodate reporting these rollovers to different types of IRAs by the entry of just one Forms 1099-R, so a single Form 1099-R reporting the combined distributions from the 403(b) will need to be split into two for entry, one showing the $17.5k and the other showing the $3.5k.

3)  The code 2 on the Form 1099-R reporting the Roth conversion indicates that you were under age 59½, so none of the money distributed from your 403(b) would be an RMD, meaning that the entire $21k distributed form the 403(k) was eligible for Rollover.  Three Forms 1099-R must be entered but the one reporting the  $17.5k rollover from the 403(b) to the traditional IRA will be nontaxable.

[BE2]

Thank you for your assistance: your answers are very helpful. 

I checked with my 403b company and found three 1099-R’s:

• Box 7, code G: $17.5K
• Box 7, code 1B: $350 (box 5)
• Box 7, code H: $3.5K

My Roth IRA custodian also has one 1099-R:

• Box 7, code 2, with IRA/SEP/SIMPLE box checked: $17.5K

I have placed them in TurboTax (TT) with a few questions/updates: 

1. For code G, TT asks “Was this Money Rolled Over to a Roth IRA?” Since this was first transferred to a traditional IRA then ultimately to a Roth IRA, should I select “Yes, this money was rolled over to a Roth IRA account”?
2. For code H, this wasn’t “a distribution from a designated Roth account to a Roth IRA” (from the IRS Instruction form) but was a direct transfer from the 403b to the Roth IRA. Does this need to be fixed through my 403b company or am I misunderstanding something about the definition of the code?
3. I’m not quite sure what the code 1B is about. I will discuss with my fiduciary.

[dmertz]

1.  When entering the code-G From 1099-R for the $17.5k rollover, answer No to both questions that ask if the rollover was to a type of Roth account.  TurboTax will then treat it as a nontaxable rollover to the traditional IRA.  (The code-2 Form 1099-R from the IRA custodian reports the taxable Roth conversion that you made from the traditional IRA.)

2.  The code-H Form 1099-R indeed reports a distribution from the designated Roth account in the 403(b) and the rollover to the Roth IRA is nontaxable.  It's clear from this and teh code-1B Form 1099-R that you made your after-tax contributions to the designated Roth account in the 403(b), not to the traditional account in the 403(b)

3.  Due to investment losses, the amount of funds in the designated Roth account in your 403(b) available to roll over to the Roth was less than your contributions.  Still the difference still became basis in your Roth IRAs due to rolling over the entire designated-Roth-account balance to the Roth IRA.  Enter the code-1B Form 1099-R and answer Yes when asked if you rolled it over to a Roth IRA.  This will cause TurboTax to add it to your Roth IRA contribution basis but will not appear anywhere on your tax return.

[BE2]

Thank you for the information. 

1) For the code 2, would the following choices be correct when asked “What did you do with the money?”

• I moved the money to another retirement account (or returned it to the same retirement account)
• I did a combination of rolling over converting, or cashing out the money (I chose this instead of “I rolled over all of this money to another traditional IRA or other retirement account [or returned it to the same account]”) 

2) For the code 1B, would the following selections be correct when asked “What did you do with the money from Fidelity Investments?”

• I moved the money to another retirement account (or returned it to the same retirement account)
• I rolled over all of this money

3) Since code H reports the direct transfer into the Roth IRA account, I should not place a Roth IRA contribution in the “Deductions and Credits” section. Is this correct?

[dmertz]

All three are correct.

[BE2]

Thank you for the info. 

1) I carefully placed all recommendations in the choices, but it treats the rollover as a contribution and it seems that I owe federal tax after placing all these forms: is this correct? It states: 

Your Roth contribution was too high. 

Roth IRAs offer some great benefits, but they have restrictions on how much you can contribute. 

You contributed $17.5K to a Roth, but your earned income was only ___. Roth contributions can't be more than earned income, which means you have an excess contribution of $11.5K" 

My apologies for all my questions: if it is easier, please let me know if it is possible to schedule an appointment with TurboTax this Monday morning. 

2) When it asks for the value of the traditional IRA at 12/31/2022, I placed $0 since all of it was transferred to the Roth IRA. Is this correct? 

[dmertz]

1)  None of this is to be reported under Deductions & Credits.  Remove the entries you made there.

2)  Correct.  If you had no money in traditional IRAs on 12/31/2022, you are to enter $0 for your year-end balance.

[BE2]

1) Yes, I’ve made sure to do that and it is still saying that message. 

2) Thank you for the information 

[dmertz]

At some point you entered $17.5k as a regular Roth IRA contribution and you have not yet removed that entry.  If you made no regular traditional or Roth IRA contributions, you can simply delete the IRA Contribution Worksheet.  (Do not delete the IRA Information Worksheet.)

[BE2]

I finished the Wages & Income section, Deductions & Credits, removed the IRA Contribution Worksheet, and tried my best to refresh everything by going to the end (Other Tax Situations). 

It is still showing in the red. 

There was a section that said: 

Retirement Income Results

Here is how your retirement and IRA distributions affect your income. 

[Below in a table]

Sections  - Total   - Taxable

Traditional & Roth IRA Distributions - $17.5K - $17.5K 

Pension & annuity distributions - $21K - $0

Total Retirement Income - #$38K - $17.5K 

Does this seem correct?

[dmertz]

Total retirement income $38.5k, $17.5k taxable would seem more correct, but perhaps the difference is just in how you are rounding the numbers.

"It is still showing in the red."

I don't what "it" is.  Perhaps there is something entered on  a Form 5329 that shouldn't be there.  If a Form 5329 is present, try deleting that too.

[BE2]

• It is due to rounding 
• It shows that I have over $2.3K in federal taxes due (in the red) which was surprising since before all 1099-Rs were placed, a $2K refund was showing: I'll discuss with my fiduciary tomorrow. If any more ideas about possible errors, please let me know.
• One other item I did notice was on the summary of 1099-R Entries summary page, it seems that the total withdrawal counted both the code 2 and code G together (so $17.5K was counted twice) but the former had "Taxable amount not determined" checked only and the latter had "Total distribution" checked" both on the original forms. I'm assuming the checked boxes accounted for the differences, but I wasn't sure why it was both counted in the Total Withdrawal part 
• There was a 5329-T form present. I have deleted that with no change in the federal tax due.