401K rollover split between Roth and traditional IRA

[lilli2]

Hi, Some years ago, I put some after-tax money into a traditional 401K and I decided to roll that over to my Roth IRA this year. Administrator was required to distribute the untaxed growth along with the after-tax contributions. I received one itemized check and deposited the after tax money in my Roth IRA and the untaxed money into my Traditional IRA.  I received one 1099, showing the gross distribution and the portion that was the (after-tax) employee contribution.

The TT tax questionnaire asks me if I rolled the distribution into a Roth IRA, yes or no. There is no option to indicate that it went to two different sorts of accounts. The chatbot tells me to enter the two amounts on separate 1099's, but I only received ONE 1099 and I don't think I should make up different numbers and make up a new form.

How can I get this information entered correctly?
Thanks!

[lilli2]

Have I stumped the community? I guess so. 

In the end, I created two substitute 1099-R forms to split the distribution into parts, and explained myself using a Form 4852 for each. Let's hope it works.

[dmertz · Accepted solution]

You are correct that the Form 1099-R needs to be split, but there is no need to enter these as substitute Forms 1099-R.  Just enter them as regular Forms 1099-R without explanation.  With no tax withholding, the details of the Forms 1099-R that you enter are not included in your e-filing, so the split necessary to accommodate TurboTax will be invisible to the IRS.

[DH21]

Hello, this answer was helpful as I rolled over a 401k from Fidelity where 95% went into a Rollover IRA and 5% of after-tax contributions went into a newly-created Roth IRA. My AGI for 2023 is over the limit for any Roth contributions, so my initial pass through TT assessed a penalty of 6% for an ineligible Roth contribution. If I do as you recommend, and enter two 1099-Rs into TT (one where the 5% of the proceeds go into Roth and one where 95% of the proceeds got into a standard Rollover IRA), will TT magically recognize this as a tax-free, penalty-free Roth contribution and not assess the penalty? THANK YOU!!

[dmertz]

@DH21 , these are a rollovers, not contributions that would be entered anywhere under Deductions& Credits.  With regard to the distribution from the 401(k), enter it only by entering the two Forms 1099-R split from the original Form 1099-R and answering the questions that immediately follow.  Go back an remove any entries you made under Deductions & Credits with respect to the amounts rolled over.

[DH21]

Thank you! It’s the first year I’ve had a Roth account and the prompt in the Deductions section for retirement accounts says to put a check mark for any “new” or existing Roth accounts and then prompts for the contributions; there is no option to specify a tax free rollover as the baseline. I did that and got the penalty assessment. I am now just going to remove the check mark for the new Roth account (treating it in TT like it does not exist) and remove the penalty. And assume that whenever I begin future withdrawals from that account TT and the IRS will somehow detect that my initial rollover baseline amount was a legitimate, tax free rollover. I like TT and know this is probably an infrequent issue but the program does not currently handle this too well.  

[dmertz · Accepted solution]

You do have Roth IRAs, so I probably would not have unmarked the Roth IRA box, you just don't have any contributions that would be entered under Deductions & Credits.

TurboTax records your basis on the IRA Information Worksheet.  The rollover to a Roth IRA of the after-tax money from traditional account in the 401(k) is treated the same as nontaxable Roth conversions from a traditional IRA, so it adds to nontaxable conversion basis for the year of the rollover.  The reason that TurboTax asks if the distribution was rolled over to a Roth IRA is so that TurboTax can track the basis correctly.  (Check to see that TurboTax didn't somehow erase your Roth basis information when you unmarked the Roth IRA checkbox under Deductions & Credits.)

TurboTax forces you to split the Form 1099-R so that the questioning needed to determine what happened with what dollars doesn't get overly complex.  Although it would be extremely unusual and I've never seen a post mentioning this happening, you could see combined a single Form 1099-R from a traditional 401(k) account a rollover to another traditional 401(k) or IRA account, an In-plan Roth Rollover and a rollover to a Roth IRA, in which case the original for would need to be split into three forms for everything to get recorded appropriately.

[DH21]

I really appreciate your help and insight. After experimenting a bit, it looks to me like - as you say - the purpose of characterizing the 401k Rollover to a Rollover Roth IRA is only to track this as the Roth IRA Basis on the TT "IRA Information Worksheet." Instead of changing my 2023 1099s, I will wait for 2024 tax reporting and then enter the correct Basis for the Roth account.

In the Deductions section I was prompted to input the correct after-tax Basis for my Traditional IRA account this year  (a Basis that has not changed since 2008) and when, as an experiment, I entered a Roth IRA Basis for a year prior to 2023 TT correctly displayed it as the Basis on the IRA Information Worksheet...the same as if I had split my original 2023 1099-R document into two separate 1099s (one with all proceeds to a Roth IRA and one not).

It's a little inconvenient, but I prefer to enter my 1099s exactly as I received them, and I will establish the correct Basis for the Roth account, which will not affect my tax reporting this year but may simplify future tracking in TurboTax, next year. But again....THANK YOU for your help!!