TurboTax not processing IRA deduction correctly; s/b taxable

[DRSmith4health]

I am a 71-year old retiree who rolled over a lump-sum pension payment into a traditional IRA in 2021.  Unfortunately, I have discovered on irs.gov that I must report a rollover of unearned income into a traditional IRA on Form 8606.  TurboTax Premier is not coding this income as taxable, thereby overstating my income.  Help!!

[Opus 17]

Can you be more clear about why you think the pension rollover should be reported on form 8606?

Form 8606 is used to report the taxable (non-deductible) basis in a traditional IRA.  For example, suppose over your lifetime you made $10,000 of non-deductible (taxable) contributions to a traditional pre-tax IRA, along with $100,000 of deductible contributions.  The value of the account is now $200,000.  Because 5% of the account was non-deductible (already taxed), then 5% of any amount you withdraw is non-taxable, even though IRA withdrawals are generally fully taxed.  This is all tracked on form 8606.

With a traditional pension, the money is contributed to the fund by your employer on a pre-tax basis, so the pension income is fully taxable when withdrawn.  Rolling over a traditional pension to a traditional IRA should not require form 8606 and should not be a taxable transaction. 

Do you have an after-tax (non-deductible) basis in this pension?  Why do you think this pension rollover requires special handling?

@dmertz 

[VolvoGirl]

Your sentence...."TurboTax Premier is not coding this income as taxable, thereby overstating my income." is contradictory.  If it not showing as taxable then how is your income overstated?  Do you think you should get a deduction for an IRA contribution?  A rollover is not a new contribution.  And rolling it over to a Traditional IRA is not taxable.  

What code is on 1099R box 7?

If you are looking at a summary screen or review screen those show the full amount as income and lump a lot of stuff together. You need to check the actual 1040 form and make sure it's right.

If you rolled it over it should say Rollover to the left of the taxable amount on 4b or 5b.   

For Online, You can preview the 1040 or print the whole return

https://ttlc.intuit.com/community/accessing/help/how-do-i-preview-my-turbotax-online-return-before-f...

[DRSmith4health]

Hello Opus 17, thank you for your response.  I needed to use Form 8606 to report this traditional IRA rollover because the amount was more than my allowed deduction of $7,000.

After posting my question to the community, I was directed to an area of TurboTax, using the Help function, which deals with this type of situation and discovered that I am not permitted to set up or add to a traditional IRA at all as I am retired.  I have to still be earning a reportable income even if fully retired (part time work, I guess) and can only deduct up to the amount of my earned income.  I was not aware of this and have to liquidate this IRA or pay a penalty.  I verified this information on other tax websites as well.

I don't know why the system did not pick this up in its initial calculation as my account info includes my date of birth, retired status and no earned income reported (only SSA and pension).  If I had not known that I needed to report the non-deductible part of my IRA, my 2021 return would have been wrong. 

Thank you again for your help.

DRSmith

[DRSmith4health]

Hello VolvoGirl, thank you for your response.  You are correct.  I was very stressed when I posted that question; I meant that my deductions were overstated, not my taxable income.

I opened a different IRA with a rollover in 2019, and the IRS recalculated my return based on the fact that the rollover amount was more than my $7,000 deduction.  I was taxed on the overage.  I thought a rollover did not count towards your annual allowable deduction.  But that obviously changed by 2019.  

If you are able to see my response to Opus 17, you will see that I am retired with no earned income and am unable to open a traditional IRA anymore.  I retired in 2019, so I had earned income at that time to cover the amount of my IRA.  I didn't know, however, that I had to be employed to open a traditional IRA. 

Thank you for sending me the link to preview my 1040.  That is very helpful to know.

[Opus 17]

@DRSmith4health 

No, you have done your IRA incorrectly. A rollover is not a contribution, and a rollover is not subject to the $7000 annual limit.

You need to delete any new IRA contributions that you reported, unless you actually made IRA contributions separate from the rollover.  

You report the rollover by entering the 1099R form that you got from the pension plan. When TurboTax asks what you did with the money, you will check the box that you rolled it over into another qualifying retirement plan. That will make the rollover non-taxable, and removing the so-called contribution should remove form 8606 as well as removing a probable form 5329 you may have created for a penalty for making an excess contribution. 

[Opus 17]

@DRSmith4health 

additionally, you most certainly do not need to liquidate your IRA. You can’t make a new contributions unless you have income earned from working. But you most certainly may do a rollover from a pension into an IRA because a rollover is not a contribution. I don’t know where you were getting your advice, but I suggest that before you make any moves, that you seek a professional accountant or financial planner to give you advice, not a seasonal storefront Fly By Night tax preparer and not “the Internet.“

[VolvoGirl]

Not sure what happened in 2019.  Sounds like you tried to enter your rollover as a new contribution and take a deduction for it.  Both now and in 2019.     No, a rollover is not a contribution and not deductible.   So it is not taxable and not deductible.  

[DRSmith4health]

Hello again Opus 17:

I do not understand the difference between entering the amount as a contribution or as a rollover.  I entered the lump sum payment in the 1099R section coded G.  On my manual form, I entered the amount of my rollover on line 5a with "Rollover" written next to the line for taxable portion.  This is a new IRA.  I did not make any contributions to it; just the rollover from the pension company to set it up.  How would I have set up the rollover as a new contribution rather than a rollover just inputting the 1099R?  I don't remember the program asking what I did with the funds.  

After answering the questions asked in the IRA Contribution Information section, the program told me that I was not permitted to set up an IRA as I had no earned income.  It also said that I should liquidate the IRA by the due date of my return (April 18 or October 17 w/extension) to avoid a penalty.  

I sincerely appreciate your help with this situation.  This is my first attempt at filing electronically, which is why I was shadowing on a manual return.  I guess my understanding of how IRA's work is flawed as well.  Can I just start over?

[DRSmith4health]

Opus 17

As mentioned in my previous response, the TurboTax system stated that I should liquidate the IRA to avoid a penalty.  I did not find this on the internet or from any individual.

[fanfare]

@DRSmith4health 

a contribution made in error can be reversed.

You don't close your IRA.

Send the correct form to the custodian.

BUT

you didn't make a contribution you just made TurboTax think you did a contribution.

This is a common error when you get a 1099-R with Code "G" (Rollover).

[DRSmith4health]

I did enter the rollover amount in the income section (line 4a in 2019 for 401K rollover/line 5a in 2021 for pension rollover).  I wrote "Rollover" next to line 4b/5b.  That was how I understood the instructions in the 1040 booklet.  Is this not correct?  I did not fill out any lines relating to an IRA deduction. 

I received a recalculation of my 2019 taxes from the IRS due to an IRA deduction miscalculation, so I assumed that it was because my rollover exceeded $7,000.  As for TurboTax, I input my 1099R info in the income section under IRAs/Pensions.  After answering the IRA Contribution Information Information, the system said was not permitted to set up/add to an IRA because I had no earned income.

This situation is totally confusing to me.  I sincerely appreciate any guidance you can offer as I am obviously not tax savvy, especially regarding IRAs.

[DRSmith4health]

@fanfare

Hello fanfare,

Thank you so much for your input.  So TurboTax is calculating my rollover as a contribution because of the Code G (lump sum distribution)?  This is the code that was on my 1099-R.  What should the code be?  I believe that there is an option to change the code if it is wrong.  Is this a glitch with the TurboTax system, because it was a lump sum distribution.

You stated that I should send the correct form to the custodian.  What form are you referring to?  It should be sent to the custodian of my IRA, or the custodian of the pension fund?

I sincerely appreciate your contribution to resolving my dilemma.  The guidance I am receiving from each member of the community is invaluable. 

[Opus 17]

@DRSmith4health 

I really want to send you to a professional.  You want an enrolled agent, this is an accountant with special credentials to practice before the IRS.  You have a problem from 2019 to fix as well as 2021–if you did a rollover in 2019, that also would not be taxable, and if the IRS sent you a tax assessment for 2019, that means you did something wrong back then as well.  

If you have not yet filed for 2021, we can probably help you, and if you already filed, we can help you with an amended return, but helping you with 2019 would be much harder at this point since you have a limited time frame to appeal the IRS assessment.  It would be better to have a professional help you with both years.  

A code G indicates this was a direct rollover (the money went directly from the pension to the IRA and did not pass through your hands).  Is that correct?  Was this a traditional IRA or Roth IRA?  When you contacted the receiving IRA, did you tell them to expect a rollover or a contribution?

[fanfare]

@DRSmith4health 

" TurboTax is calculating my rollover as a contribution because of the Code G (lump sum distribution)?  "

That is not correct.

TurboTax is treating your entries as a contribution.

You made an entry error.

Code G is the correct code for Rollover.

If you delete all IRA forms and other entries, (e.g. contributions), and re-enter it you should get it right the second time.

stay away from the "Contributions" section of TurboTax.