Who is responsible for reporting the taxable amount when rolling over a traditional 401k to a Roth IRA? My 1099-R shows the taxable amount (in box 2) as "0.00".

[dpbrick5868]

The funds were rolled over from one company (Co#1) to another company (Co#2). I entered the 1099-R as printed into TurboTax Home & Business, but neither Federal or State taxes owed increased.  But my understanding is that the total amount of the distribution should be taxable.  Both Co#1 and Co#2 say everything was handled and reported correctly.  So do I just need to report the taxable distribution separately as miscellaneous income?

[macuser_22]

What code is in box 7?
Is anything in box 5?

Was the 401(k) trustee specifically instructed that this was to be a conversion to a Roth IRA or did you just decide to put it in the Roth yourself after the check was issued?    (How to properly report it depends on the answer).

If a direct rollover, then the check should have been made out to the custodian of your Traditional IRA or to the custodian of your Roth IRA and the receiving custodian should have placed it in the proper type of account - but often the issuer does not specify the IRA type which can lead to problems.

[dpbrick5868]

The code in box 7 was "G" - Direct Rollover and Rollover Contribution.  Box 5 is empty.  The old custodian company was told it was being rolled over to a Roth IRA.  That was the plan all along.  The distribution check was sent to me but made out to the new custodial company, and I deposited it with them within a week of receiving it.

[VolvoGirl]

Did you deposit it directly into the ROTH account?  Maybe it went into a regular Traditional IRA Account first then transferred to gene ROTH?  Then you might need another 1099R from the new custodian showing the conversation.

[macuser_22]

The OP did not indicate that it was first put into a Traditional IRA and then converted to a Roth and there were two 1099-R forms.

[macuser_22]

401(k) to Roth conversions used to be done that way - to a Trad IRA first and then to a Roth, but the IRS rule change (The 2006 Pension Protection Act - I think if memory serves me) changed the rules to allow direct 401(k) to Roth conversions, so it is usually done directly now.

[dpbrick5868]

No, it was a direct rollover to the Roth IRA.  Yes, that is what I'm told regarding the rule change.  Unfortunately, it was probably clearer the old way.  This has been nothing but a headache for me this year.  Now they want to charge me a $39 penalty, too, because I just followed the instructions in TurboTax and didn't include the payment for the increased tax liability in my original return filing.

[macuser_22]

Are you saying that you already filed with the original 1099-R?    That changes my answer if you did.   If the IRS already sent a letter, and a bill, then just pay the tax unless they specifically say to amend.

(If they charged a late penalty, then you can ask for a waiver of the penalty because  it was not your error - it was because of an incorrect 1099-R.)

[dpbrick5868]

I filed with the original 1099-R.  It wasn't until afterwards I started wondering how the taxes on that distribution would come due.  I ran a "what-if" scenario in TurboTax, changing the amount in box 2 to the full amount in box 1.  It came up with a huge increase in the amount I owed (I was due a refund before), and included a $39 estimated penalty.  So no, I haven't heard back from the IRS yet, except they already deposited my refund.

[VolvoGirl]

Did your 1040 say Rollover by line 4 and zero taxable amount on 4b?

[macuser_22]

Well then I would amend using the method in my answer. and pay the tax due.    If you do not, then the IRS *will* catch it, but it might take a year or more before they match the 5498 from the receiving bank and by then the late charges and interest on the back tax will be a lot more than the underpayment penalty.      (In most cases if you do not pay the underpayment penalty and just let the IRS bill it, they never will.)    (If you willingly amend and pay the tax due by the method in the answer, then the IRS "might" just accept the explanation statement that this was an innocent error on your part due to an incorrect 1099-R and waive all penalties - they cannot waive interest since that is required by law.)

[dmertz]

I think it would far better to proactively correct the underpayment of taxes rather than wait for the IRS to catch it.  If the amount of the underpayment is substantial, the IRS can impose an accuracy-related penalty on top of the regular underpayment penalty, particularly now that you recognize you have an underpayment and failing to amend might constitute negligence.

[dmertz]

If the payer insists that the Form 1099-R is correct, it seems to imply that they believe that the rollover was made to a traditional IRA.  If your distribution request was properly made to have the direct rollover go directly to a Roth IRA, the payer is simply wrong to have prepared the Form 1099-R as if the rollover was to a traditional IRA.  However, the most common cause for this sort of disagreement occurs when the participant requests that the payer perform a direct rollover to a traditional IRA but at the IRA custodian diverts the direct rollover to a Roth IRA instead.

[macuser_22]

The OP said above "The old custodian company was told it was being rolled over to a Roth IRA.  That was the plan all along."   That could be hard to prove unless the directions were in writing.

[macuser_22 · Accepted solution]

In that circumstance the issuer should issue a corrected 1099-R with the box 2a the same as box 1 since they issued an improper 1099-R for a Roth conversion, but since you indicated that they insist that the 1099-R is correct then you need to enter the 1099-R as a "substitute 1099-R"  4852 form (bottom choice on the 1099-R screen.

Enter all information the same as the 1099-R you received but make box 2a the same as box 1.   The interview will ask for an explanation statement and the steps you took to have the issuer correct the 1099-R  - just say that that the original 1099-R assumed a rollover to a Traditional IRA, but the money was actually converted to a Roth IRA and the issuer refused to correct it.

In the interview answer NO to the first 401(k) Roth question answer YES to the Roth IRA question and say that you have no after-tax contributions (since box 5 did not indicate any).

That should make the box 2a taxable on the 1040 line 4b with ROLLOVER next to it.