401K to Roth IRA Conversion Reporting

Forum|Forum|3 years ago
October 19, 2022
21 replies
159 views

Hello - I plan to convert some funds from my 401K (tax deferred plan) to Roth IRA for the 2022 tax year. I am using the 2011 TurboTax Premier CD disk version as a test to see how the TurboTax input works and what forms it would generate. I saw a TurboTax forum discussion from a year ago that says to go to "Deduction" section, and then the retirement investment topic to do the input by inputting the converted amount as Roth IRA conversion, and then go to the wage and income section to input the converted amount as non-deductible IRA? But when I input the converted amount (i.e., $30,000) as Roth IRA contribution, the TurboTax software came back and said I have excess contribution and calculated a 6% penalty. It doesn't seem to show what the instruction indicated in the discussion forum. I am retired and do not have any wage earning in 2022. Please advise me the input steps. Thank you.

Best answer by dmertz

The movement of funds from a traditional 401(k) account straight to a Roth IRA is defined in the tax code as a taxable rollover, not a Roth conversion. The term "Roth conversion" only applies to a movement of funds from a traditional IRA to a Roth IRA. A 401(k) is not an IRA. Because a rollover of a traditional 401(k) to a Roth IRA is not a Roth conversion, it is not reportable on Form 8606.

Note that the tax code does permit the movement of funds from a traditional 401(k) to a Roth IRA, but some plan reps are still not aware of this despite it being permissible for more than 10 years. They might mistakenly suggest that you must first roll the traditional 401(k) over to a traditional IRA and then do a Roth conversion from the traditional IRA, which would be reportable on Form 8606, but rolling first to a traditional IRA is not necessary.

To avoid mandatory tax withholding you must do the rollover from the 401(k) as a direct rollover where the plan makes the distribution payable directly to the receiving IRA for your benefit. By making the distribution payable to the particular IRA rather than just to the custodian for your benefit it avoids the possibility that the custodian deposits the funds into the wrong type of account. This means that the receiving account needs to already be established and then is subsequently funded by the rollover.

VolvoGirl

Level 15

Did you mean you are using the 2021 CD Desktop program? No it's not a deduction. Enter it like you got a 1099R distribution under Income. It is not a ROTH IRA contribution. It is a rollover or conversion. If your 401K was pretax it will all be taxable at your regular income bracket and may push you into a higher bracket.

Enter a 1099R under

Federal Taxes Tab or Personal (Home & Business)

Wages & Income at the top

Then scroll way down to Retirement Plans and Social Security,

Then IRA, 401(k), Pension Plans (1099R) - click Start or Revisit

Hal_Al

Level 15

When entering the test 1099-R, enter the same amount in boxes 1 and 2a, unless you know that some of your 401k money is "after tax". In that case, leave box 2a blank and check the box "Taxable amount not determined". Follow the interview carefully.

For more on this subject, see:

https://www.investopedia.com/articles/retirement/08/convert-401k-roth.asp

Hal_Al

Level 15

Apparently form 8606 is only generated when an IRA is converted. Note that TT treats the $20,000 as taxable by placing it on line 5b of form 1040.

@dmertz Can you confirm?

S

syoung123Author

Level 6

Thank you for your replies. I went to the 2021 desktop TurboTax Premier, using a "made-up" 1099R and input the following steps. Please let me know if the steps are correct.

1. "Wages and Income", "Retirement Plan and Soc Sec", "IRA, 401K, Pension Plan (1099R)"

2. "Your 1099R Entries" - "add another 1099R"

3. "Enter 1099R" - box 1 and 2a, enter the same amounts - i.e, $20,000, box 2b check "total distribution", box 7 "G", IRA/SEP/Simple box not checked, leave all other field, leave blank

4. "Rollover 401K to Roth 401K" - "no", since this is a rollover of 401K to Roth IRA

5. "Was this money rolled over to Roth IRA - "Yes"

6. "Rollover of 401K to Roth IRA" - "no" - did not make after tax contributions

7. "qualified disaster distributions" - "no"

The software appeared to process this correctly. When I checked the 1040SR tax return, I saw TurboTax put "rollover" next to the 5b box, pension and annuities taxable amount line, which has the converted amount (i.e, $20,000). As far as I cane tell, there is the only change on the tax return forms. I thought it would generate form 8606 non-deductible IRA, but TurboTax did not generate this form. Please advise.

O

Opus 17

Level 15

@syoung123

Form 8606 is generated when you have a non-deductible basis in a traditional pre-tax IRA. You don't have that; you have a Roth IRA, which is different.

D

dmertzAnswer

Level 15

The movement of funds from a traditional 401(k) account straight to a Roth IRA is defined in the tax code as a taxable rollover, not a Roth conversion. The term "Roth conversion" only applies to a movement of funds from a traditional IRA to a Roth IRA. A 401(k) is not an IRA. Because a rollover of a traditional 401(k) to a Roth IRA is not a Roth conversion, it is not reportable on Form 8606.

Note that the tax code does permit the movement of funds from a traditional 401(k) to a Roth IRA, but some plan reps are still not aware of this despite it being permissible for more than 10 years. They might mistakenly suggest that you must first roll the traditional 401(k) over to a traditional IRA and then do a Roth conversion from the traditional IRA, which would be reportable on Form 8606, but rolling first to a traditional IRA is not necessary.

To avoid mandatory tax withholding you must do the rollover from the 401(k) as a direct rollover where the plan makes the distribution payable directly to the receiving IRA for your benefit. By making the distribution payable to the particular IRA rather than just to the custodian for your benefit it avoids the possibility that the custodian deposits the funds into the wrong type of account. This means that the receiving account needs to already be established and then is subsequently funded by the rollover.