Why doesn't TurboTax reduce cost basis for 1099-R early distribution of Roth IRA?

[itbeme]

In 2020 I took an early distribution of my Roth IRA (I'm not 59 1/2).  The initial investment I contributed isn't included on my 1099-R form since I had rolled over the funds from my 401K into the brokerage account.  I have tried to manually enter the amount of my contributions but TurboTax isn't calculating the difference and lowering my actual taxable income.  When I enter my contributions nothing happens.  No numbers change.  I even tried inputting the amount into different lines (lines 5 and 9a).  Why is this happening?

[ReneeM7122 · Accepted solution]

You are correct, the cost basis for Roth IRAs is important when you take an early withdrawal.  This is because the money you receive comes off the cost basis first, rather than being prorated.

In order to make the software respond to this, it needs to handle Form 8606, Nondeductible IRAs.  The software should automatically trigger this form when there's a distribution from a Roth IRA (other than rollovers, recharacterizations, or a return of certain contributions), but if it didn't, here's how to generate form 8606:

1. Open your return if it isn't already open.
2. Inside TurboTax, search for this exact phrase: 8606 nondeductible ira contributions
3. Select the Jump to link in the search results.
4. Proceed through the IRA section, answering questions as you go.
5. When you reach the screen Any nondeductible contributions to [taxpayer's] IRA? answer Yes, then continue. We'll generate and fill out the 8606 behind the scenes.

If this doesn't reduce your cost basis, please come back with more details about your Roth IRA and the documents that you have received to use in  preparing your return.

[itbeme]

I was able to get the correct form, although not the exact way you described.  Once I entered the Roth basis there was a dramatic change in refund amounts, which is what I expected.  Thank you for the help.

[Anonymous]

I entered my Roth basis on the "IRA Information Worksheet".  Part V of that sheet allows you to enter your  Cumulative Roth Contributions on Line 23.  The same table also allows you to enter any Roth conversions you made.  After you make these entry, the calculations should go through.