529 Rollover to Roth

[Mochina]

My son meets the requirements for rolling over $7000 in excess 529 funds (a combination of funds from two 529 accounts) to his Roth account as his 2024 contribution. We understand that he has until April 15, 2025 to take this action, but he is planning to do this within the next 2 weeks as he completes his federal and California state income tax forms.  He does not yet have the corresponding 1099-Q. 

1) Is it correct to assume that he doesn't have to wait for the 1099-Q to file his federal return since there is no entry required in TT for this 1099-Q? 

2) Because CA does not comply with the federal law for 529 to Roth rollovers, the earnings portion of the distribution does have to be entered in TT, does he needs to wait until the 1099-Q arrives or can he just enter the earnings portion indicated to him by the 529 representative on the phone as an adjustment to income?  He has already seen the directions that TT expert AmyC has posted on how to do this. 

[KrisD15]

If you know the correct amount to enter, (the earnings on the 529 account) you can enter the amount of earnings obtained that way, however a phone call is not something you can document and keep with your tax files. Something tangible would be needed to substantiate the entry if it were questioned (even though it is INCLUDING earnings for the CA return, not reporting for a credit or deduction). 

Try to get a copy of a statement from your online account showing the earnings. 

If you decide to rely on the phone conversation and it ends up the amount differs, it won't matter on the Federal return, but your son would then need to amend the California state return. 

FOR THE CALIFORNIA RETURN enter the taxable earnings under the adjustment screen in the California state return.

The adjustment will be asked for when going through the California state return.

You can go to the "Here's the income California Handles differently" screen

Under "Miscellaneous adjustments" you will find "Expanded use of 529 funds" START

Enter only the amount of taxable earnings.

[Edited 02/09/2025 I 9:54am PST]

[Mochina]

KrisD15:

Thank you for the reply to my 2nd question, but could you confirm for question #1, that my son doesn't need to wait for the 1099-Q to file his federal return since there is no entry required in TT for this 1099-Q? 

[KrisD15 · Accepted solution]

Yes, I will also add that to the original answer for other customers with the same question looking for assistance.

FOR THE CALIFORNIA RETURN enter the taxable earnings under the adjustment screen in the California state return. 

The adjustment will be asked for when going through the California state return. 

You can go to the "Here's the income California Handles differently" screen

Under "Miscellaneous adjustments" you will find "Expanded use of 529 funds"    START

Enter only the amount of taxable earnings.

[HighEagle]

Disappointed in the incomplete responses given by TurboTax. Sloppy handing of special situations is a continuing frustration for this 20-year TT user.

Daughter received a 1099-Q for 2024 that includes amounts rolled into her Roth IRA after January 1, 2024 for tax years 2023 and 2024. About half of the total distribution is Earnings and the other half is Basis. 

I reviewed a question on this topic and a response stating that the 1099-Q should not be entered on the Federal return because it is not taxable. That seems sketchy. TurboTax asks "Did you receive a 1099-Q?" It seems odd to say no. TT could at least record the particulars of the 1099-Q and then ask about the special situation of a qualified rollover. Then the transaction would be tracked properly, even if not included in the Federal filings.

For California, the checkbox brings up a dialog that asks about 529 rollovers to Roth. It does not specify whether the amount entered should be the Gross Distribution or the Earnings. I chose to enter Earnings, to avoid being taxed on the Basis. The proper way for TurboTax to address this would be to record the Gross Distribution, Earnings and Basis separately in the application. Then TT should enter the proper amount in the California tax form. 

Please clarify. Thanks. 

[AmyC]

1. I agree that saying no feels odd. If the question read, Did you receive a taxable 1099-Q distribution, you would feel better. Do not enter the 1099-Q if nothing is taxable to the federal.

TurboTax is a do it yourself program with a goal of getting the correct information on your tax forms.  According to the IRS:

• “A Roth IRA for the benefit of the same beneficiary, if the distribution is a direct trustee-to-trustee transfer from a QTP account that has been open for more than 15 years and the amount distributed does not exceed total contributions (and attributable earnings) made to the QTP more than 5 years before the distribution date. However, this doesn't apply to the extent the amount distributed when added to other amounts contributed to Roth IRAs exceeds the annual contribution limit. For more information about contributions to Roth IRAs, see Pub. 590-A.”
• “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.”

2. For CA, the entry asks for the amount excluded from the federal. FTB says: Rollover distribution from an IRC Section 529 plan to a Roth IRA is includible in California taxable income and subject to an additional tax of 2½%. 

The earnings are the taxable portion and should be entered. The basis is never taxable to federal. Great job thinking this through!