RMD Rollover

[ajmoody]

My broker created a Roth IRA to transfer part of my RMD under the cares act. In Turbo Tax when I go through the steps and put the amount $20,000 as a Roth IRA rollover there is no tax adjustment. However if I record it as a rollover to another retirement account, the program reduces the taxes as I understand they should be. Why the difference?

[macuser_22]

Taking money out of your Traditional IRA and putting it into a Roth IRA is * not* a non-taxable rollover - it is a taxable rollover *conversion* of before tax money in the Traditional IRA to after tax money in the Roth.   To do that you must pay the deferred tax at the time of the conversion.

The 1040 form line 4b should show the taxable amount of the conversion.  If the entire 1099-R box 1 amount then that will be on line 4b.

[DanaB27]

If you put money from a traditional IRA to a Roth IRA then you are converting money and this amount is included in your taxable income. It is included because qualified Roth distributions are not included in taxable income but distributions from an traditional IRA are all included in your taxable income (unless you had nondeductible contributions in it).

If you return it back into the same account (rollover) then it will not be included in your taxable income because you returned it.

If you put it in a Roth IRA (convert) then it will be included in your taxable income.

[ajmoody]

I wasn't very clear. The rollover was from a SEP-IRA. The RMD from the SEP-IRA was made and federal taxes were withheld from the disbursement. The RMD was then redeposited in the Roth IRA. If I show it as a rollover to a Roth IRA in TT it does show it as a nondeductible rollover. However if it is recorded as a rollover to another retirement account it is deductible.  

[DanaB27]

Yes, the amounts put in the Roth IRA from a SEP IRA  (a conversion) will be included in your taxable income. But amounts put from a SEP IRA to a traditional IRA or returned into the SEP IRA ( a rollover) will not be included in your taxable income. TurboTax is handling this correctly.

The withheld tax from the 1099-R will show on line 25b on Form 1040.

Please ensure that are entering the conversion to the Roth IRA in the correct area:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Click "Continue" and enter the information from your 1099-R
5. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”

Do not enter the money under IRA contributions under Deduction and Credits.

[ajmoody]

So, even with the Cares Act, the fact that the RMD was placed in a Roth IRA rather than back in the SEP-IRA disqualifies any tax reduction. It just allows for a higher annual contribution to a Roth IRA.

[DanaB27]

Correct, the Cares Act will not change the fact that Conversions to a Roth are included in the taxable income. Please be aware that a conversion is not considered a contribution.

[macuser_22 · Accepted solution]

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@ajmoody wrote:

So, even with the Cares Act, the fact that the RMD was placed in a Roth IRA rather than back in the SEP-IRA disqualifies any tax reduction. It just allows for a higher annual contribution to a Roth IRA.

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The CARES act did not suspend ANY ordinary tax that would not be present absent the CARES act, it only suspended the 60 day rollover time limit to even allow the rollover in the first place.   It is only tax free if rolled back to the account that the money came from which was the intent of the law - to avoid the tax as if the distribution  has never happened.   You did not do that - you did something else with the money and created a taxable conversion.