Why does 401(k) rollover to traditional IRA significantly increase tax liability?

[sdfsldjfslkd]

1. I've filled in all other items in my return and TT estimates over $750 return due back from Uncle Sam.

2. I enter my 401(k) rollover details from 1099-R (from 401(k) into traditional IRA per code "G" in box 7) with no change to estimated return, which is expected since rolling over from 401(k) to IRA is not a taxable event. Rollover completed before the end of CY2019.

3. I enter the value of my new rollover traditional IRA as of 12/31/2019 per my brokerage statement in "Tell us the value of your traditional IRA" and return immediately turns into >$400 OWED to Uncle Sam. The new rollover completed prior to 12/31 and it is my only traditional IRA.

>> Why does my balance due flip >$1,100 in Uncle Sam's favor? Traditional 401(k) rollover into traditional IRA after changing employers (my case) is not a taxable event. If I had not performed the rollover, the same balance would exist within my 401(k) and would have zero impact within TT. What am a I missing here?

[fanfare]

Hit CONTINUE and answer the questions.

Tell TurboTax you rolled it over, even though it should know that from the Code of "G".

[dmertz]

Is the amount in box 2a of the Form 1099-R provided by the payer $0, a nonzero amount or blank?

[sdfsldjfslkd]

Box 2a is blank.

[dmertz]

If box 2b Taxable amount not determined is not marked, the payer left box 2a blank thinking that a blank box 2a under these conditions means the same as a zero in box 2a.  Try entering a zero in box 2a.

If that fails, try deleting and reentering the Form 1099-R, making sure to answer No to the questions asking if this distribution was moved to any kind of Roth account.

In checking to see if this rollover is being handled correctly, be sure to look at Form 1040 to see that line 4c shows the entire gross amount but line 4d excludes this amount and that the word ROLLOVER is present next to line 4d.

[sdfsldjfslkd]

When I get to the screen:

"Tell us the value of your traditional IRA

Enter the total value of all of your traditional IRA, SEP, and SIMPLE IRA accounts on December 31, 2019. This information is sent by mail on Form 5498. Do not include ROTH IRAs.

Enter any outstanding 2019 rollovers and recharacterizations that were not completed until 2020.

Value of your Traditional, SEP, and SIMPLE IRAs on December 31, 2019: XXX

Outstanding Rollovers: $0.00

Outstanding Recharacterizations: $0.00"

My 401(k) to traditional IRA rollover completed before 12/31, so I have no outstanding rollovers. I won't get Form 5498 until May, but I can check the 12/31 balance of that IRA (the rollover account is my only trad IRA). The instant that I enter the 12/31 balance for the IRA account, my refund tanks >$1100.

[sdfsldjfslkd]

I explicitly entered $0.00 as you suggested, and have deleted and re-entered this 1099-R many times, but I still hit the fundamental problem below.

When I get to the screen:

"Tell us the value of your traditional IRA

Enter the total value of all of your traditional IRA, SEP, and SIMPLE IRA accounts on December 31, 2019. This information is sent by mail on Form 5498. Do not include ROTH IRAs.

Enter any outstanding 2019 rollovers and recharacterizations that were not completed until 2020.

Value of your Traditional, SEP, and SIMPLE IRAs on December 31, 2019: XXX

Outstanding Rollovers: $0.00

Outstanding Recharacterizations: $0.00"

My traditional 401(k) to traditional IRA rollover completed before 12/31, so I have no outstanding rollovers or recharacterizations. I won't get Form 5498 until May, but I can check the 12/31 balance of that IRA from the EOY statement (the rollover account is my only trad IRA). The instant that I enter the 12/31 balance for the IRA account, my refund tanks >$1100.

[sdfsldjfslkd]

When I get to the screen:

"Tell us the value of your traditional IRA

Enter the total value of all of your traditional IRA, SEP, and SIMPLE IRA accounts on December 31, 2019. This information is sent by mail on Form 5498. Do not include ROTH IRAs.

Enter any outstanding 2019 rollovers and recharacterizations that were not completed until 2020.

Value of your Traditional, SEP, and SIMPLE IRAs on December 31, 2019: XXX

Outstanding Rollovers: $0.00

Outstanding Recharacterizations: $0.00"

My traditional 401(k) to traditional IRA rollover completed before 12/31, so I have no outstanding rollovers or recharacterizations. I won't get Form 5498 until May, but I can check the 12/31 balance of that IRA from the EOY statement (the rollover account is my only trad IRA). The instant that I enter the 12/31 balance for the IRA account, my refund tanks >$1100.

[dmertz · Accepted solution]

I suspect that you have basis in nondeductible traditional IRA contribution and you made a traditional IRA distribution in 2019, perhaps a Roth conversion, that you have not yet mentioned here.  By rolling of the 401(k) to the traditional IRA in 2019 you have caused a substantial increase in your year-end balance in traditional IRAs that affects the calculation of the amount of your traditional IRA distribution that is nontaxable, substantially reducing the nontaxable amount of the distribution and substantially increasing the amount of basis that remains in your traditional IRAs to be applied to future traditional IRA distributions until you have no more money in traditional IRAs.  You can see the calculation on Form 8606.  Rolling a 401(k) over to a traditional IRA in the same year as the Roth conversion is a common pitfall for those trying to do a "backdoor Roth."

(The other possibility is that you have mistakenly also entered this rollover as a new retirement contribution under Deductions & Credits, resulting in your tax return reporting an excess contribution that you did not actually make.  The penalty is calculated on the lesser of the amount of the excess contribution or your year-end balance.  However, this particular question about your year-end balance is asked in a different part of the interview than the one you mentioned, so I doubt that this is the issue.)

[sdfsldjfslkd]

Thanks, I did perform a backdoor Roth (much earlier in the year) that was fully executed long before the 401(k) rollover. You seem quite knowledgeable and I sincerely appreciate the quick feedback. I however am out of my depth and not comfortable using software to file my taxes with all these complexities. I'll be returning TT to Costco and hiring a professional accountant to walk me through all this.

[dmertz]

With respect to any traditional IRA contribution, Roth conversion and the 401(k) rollover, it seems like you are getting a correct result, if not the desired result.  It doesn't matter whether the 401(k)-to-traditional IRA rollover or the Roth conversion was done first, the result will be the same because the taxable and nontaxable amounts of the Roth conversion are required to be calculated using the year-end traditional IRA balance, not the balance at any other time during the year.

[chapjim]

I have a similar, perhaps identical problem.  I rolled a 401(k) to a traditional IRA (no conversion to Roth).  The 1099-R shows a value in Block and $0.00 in Block 2a.  Since I never had control of these funds, I can't see why they are treated as taxable income.  

I tried to reflect the amount in Block 1 as a contribution to an IRA but that triggered all kinds of responses about excess contributions, penalties, etc.

Where did I go wrong?

[RaifH]

If the only distribution from your 401(k) was rolling it over into your traditional IRA, then that should not be taxable. Make sure you entered it in this manner:

1. Go to Federal > Wages & Income > Retirement Plans & Social Security > IRA, 401(k), Pension Plan Withdrawals (1099-R) and click Start / Revisit.
2. Continue through the screens to import or enter your 1099-R form.
3. When asked Tell us if you moved the money through a rollover or conversion select I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days) and Continue.
4. On the next screen, Did you roll over all of this (Box 1) to another retirement account? answer Yes, I rolled over to an IRA or other retirement account (or returned it to the same account) and Continue.

You may not receive all these questions depending on the distribution code on Form 1099-R, but as long as you said it was rolled over into another IRA, the distribution is not taxable. 

You can preview your 1040 to make sure it is not being taxed:

You can preview your 1040 by:

1. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
2. With the Tax Tools menu open, you can then: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu.
3. Scroll down until you see Form 1040 Line 5. Line 5a should have the entire distribution amount. Underneath, it should say ROLLOVER, and line 5b should be blank.

@chapjim

[chapjim]

TurboTax does not give the opportunity to respond as you say in Lines 3 and 4.  Nevertheless, when I go to the 1040 preview, it does say ROLLOVER under Line 5a.

But, in the comparison between 2021 and 2020, my gross income increases despite the fact that I retired at the end of September 2021.  The increase in gross income it attributable to the 401(k) rollover. 

I was looking for some way to offset which is why I tried to reflect the rollover amount as a contribution to an IRA.  As I mentioned in my first post, that triggered some ominous results.

I'll go through your suggestions again but it seems a lot depends on the Distribution Code (G, in my case) but that comes from the 1099-R.  No options for me.

[MarilynG1]

Sometimes when you try to review/edit a 1099-R you already entered, you may not get the same screens in TurboTax.

You could Delete your 1099-R and re-enter it from scratch.

Type '1099-r' in the Search area, then click on 'Jump to 1099-R'.

At the Summary page, Delete the 1099-R (in TurboTax Online use the Trash Can icon).

Click somewhere else in the program, then type '1099-r', etc. again and Add your 1099-R. 

This link has more info on 401K to Traditional IRA Rollover.