Situation:
- In 2020 I made after tax contributions to my 401(k).
- Those after tax contributions had some gains throughout the year.
- At year end 2020, I converted those after tax fund AND associated gains to a Roth IRA.
- 1099-R correctly shows the distribution type as G, shows the cap gains portion in box 2a, and the amount of after tax contributions in box 5.
- Note box 3 is empty.
Question:
Since this is all after tax funds and associated cap gains, I would expect the cap gains (box 2a) to be taxed at the cap gains rate and NOT at the income rate. Am I mistaken or am I incorrectly characterizing this in Turbo Tax (which is currently applying the income rate)?
Appreciate your thoughts; Thanks!
You expect incorrectly. Capital gains (or losses) do not apply to retirement accounts. All taxable distributions are taxed as ordinary income. That is the advantage of tax deferred retirements accounts - you pay no tax on the earnings when earned so it can grow tax free, but when distributed it is ordinary taxable income.
That is one difference between a brokerage account and retirement account.