529 Rollover to Roth in 2024 - how to report on tax return

[Earlybird]

Hello - I don't have the 1099Q yet but wanted to know how this gets reported in Turbotax to reflect that the distribution is not taxable.  I tried to do a mock up of the 1099Q with the data I have, but I didn't see an option in Turbotax to distinguish this type of transfer. 

Thanks

[Sam618]

I have the same question. Specifically, does the beneficiary report the 529 to Roth IRA transfer or the account owner report the transfer?

I have two 529 accounts for my two sons. I executed transfer for each of their 529 accounts into their Roth IRA accounts. The custodian of the accounts, Fidelity, issued two 1099-Q forms for the transfers in my account.

1. One is address to my son with his SSN, and box 6 of the form is unchecked (meaning recipient is the designated beneficiary).

2. The other one is address to me, the account owner, with my SSN, and box 6 of the form is checked (meaning the recipient is NOT the designated beneficiary).

One of these forms must be incorrect.

It made me wonder who should report the transfer in TurboTax. Me, the 529 account owner? Or my sons, the beneficiaries of the 529 accounts and the owner of the Roth IRA accounts?

Thanks.

[Hal_Al]

I'm not seeing how to do it. I have desktop (download) Deluxe.  I have flagged this issue to the TurboTax Moderators.  I'll post here, when I hear from them.

In the mean time, I believe this statement still applies:

Just don't enter the 1099-Q in TurboTax.  When the box 1 amount on form 1099-Q is fully covered by expenses, or ROLLED OVER to another qualified account, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records (the work sheet isn't going to tell you anything that will help with an IRS inquiry).  You'll need to show it went to another trustee.  

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

But, you need to be sure that you meet all the new rules:

• $7000 yearly limit
• Your 529 savings account must be open for over 15 years before funds can be rolled over into a Roth IRA. 
• It must be a trustee to trustee rollover (the trustee to trustee rollover box will be checked on the 1099-Q)

• the Roth IRA must be in the beneficiary’s name

• 529 contributions made within the preceding five years cannot be rolled over.

• Beneficiary must have earned income that year of at least the amount transferred

• $35K lifetime maximum (2024 is the 1st year that the Roth rollover is allowed, so this isn't an issue yet)

[Hal_Al]

Q. Does the beneficiary report the 529 to Roth IRA transfer or the account owner report the transfer?

A. Only the beneficiary.

Q.  The other one is address to me, the account owner, with my SSN, and box 6 of the form is checked (meaning the recipient is NOT the designated beneficiary).

A. That's not right.  Ask Fidelity for an explanation. If the 529 beneficiary is different from the 529 owner, the Roth IRA must be in the beneficiary’s name. 

[Sam618]

Thank you for the response.

I called Fidelity and they agree the 1099-Q that addressed to me, account owner, and using my SSN does not look right.

Though they said it doesn't matter since this is a qualified withdrawal and Fidelity doesn't report the 1099-Q to IRS 🤔.  My son will not need to submit the 1099-Q in the tax return.

The form is purely for my (or the beneficiary) record, and the key info is box 4 trustee-to-trustee transfer is checked.

I asked them to update the form anyways to fix the TIN and address to the beneficiary, and feel some pushback.

Regardless, I assume my son just need to report the amount transferred as Roth IRA contribution in his TurboTax Deluxe Desktop version. If I recall correctly, TT does ask "Do you have any other forms?" at the end and I will tell him to type in 1099-Q to see if there are additional steps required.

Thanks again.

[Earlybird]

OK I did enter the 1099Q - just received - to see again if there was an option to reflect as a rollover to a Roth.  There is not, and it computes the earnings as taxable income.  I am concerned about receiving an IRS notice for this later since it will appear as unreported income.  I am surprised there is no mechanism on the return to reflect this kind of transfer.  I could delete the form entirely but that doesn't seem right to me.  Will there be further updates on this from Turbotax?  Thanks

[Hal_Al]

Q.  Will there be further updates on this from Turbotax? 

A.  Yes, they will announce it in any updates and I plan to post to this particular discussion, when they notify me. 

Q. I am concerned about receiving an IRS notice for this later since it will appear as unreported income.  

A. No. You are no more likely to hear from the IRS if you don't enter the IRS.   it's just the opposite, if you enter the 1099-Q, you're more likely to make a mistake that will trigger a flag.

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

I was somewhat surprised to hear that Fidelity doesn't send the 1099-Q to the IRS, when they know the distribution is qualified. 

[Sam618]

Fidelity just called me and told me their back-office team would not update the incorrect 1099-Q for the transfer. The one that addressed to me (529 account owner) and used my SSN, instead of my son name and SSN (529 beneficiary and Roth IRA owner).

The Fidelity associate again told me for qualified transfer, I don't have to report the 1099-Q, and they don't report qualified transfer to IRS and do not have instructions to make the correction. I told him I will call Fidelity if I get flagged by IRS. LOL

[Earlybird]

For reference, Vanguard only issued one 1099Q in the name of my daughter/beneficiary/Roth owner. What Fidelity  did and is standing by doesn’t make sense. I am not a believer that they don’t report these to the IRS. Distributions for qualified educational expenses are definitely reported. Is it your impression that they are just saying trustee to trustee transfers are not reported?  I’ll ask Vanguard about whether they report this to the IRS. 

[Sam618]

Thank you @Earlybird for the info. The Fidelity associate kept insisting that they don't report trustee-to-trustee transfers and qualified withdrawals to IRS. It does sound dubious because how do they know it is a qualified transfer or withdrawal. I am trying to get it in writing, but Fidelity hides the feature to send them message very well. They want me to call or chat with their virtual or live agents.

Also, for your reference. I made three 529 to Roth IRA transfers for my two sons and my daughter in 2024. My two sons 529 accounts are with Fidelity, and they got one right (issued to the beneficiary) and one wrong (issued to me).

For my daughter, I paid tuition and made a 529 to Roth IRA transfer. She just graduated, and the transfer met the rules (held for > 15 years, last contributed > 5 years ago, etc.). I received two 1099-Q forms from the firm where her 529 account is held. One to my name and SSN for the tuition withdrawal (box 4 unchecked and box 6 checked). One to her name and SSN for the Roth IRA transfer (box 4 checked and box 6 unchecked).

Thanks again. I will let you know if I get Fidelity to respond in writing that they don't report the 529 to IRA transfers to IRS.

[Earlybird]

IRS Publication 970, page 54 says

"Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren't taxable distributions."  When it refers to the above criteria, one of the rollover types is the transfer to a Roth IRA as long as it meets all of the criteria (explained on page 53 of pub 970).

From past experience with 529 plans and the IRS, I am not convinced they won't routinely consider this unreported income that you have to explain. But their publications support the idea that none of this gets reported.  I just hope that when this is reported to the IRS by the institutions, that the IRS understands what they are seeing.

[Earlybird]

OK for what it's worth, Vanguard has confirmed that they do report these 1099Q trustee to trustee to the IRS.

They also told me to file when I have the Form 5498 which should help, but those forms are not published until after the tax return deadline.  Again, from my earlier post, the IRS publication says this is not a taxable event and not to report it, but the reality of not reporting income (even when you are correct) can cause IRS notices.