One 1099-R for rollovers from Trad 401k to Trad IRA and Roth IRA

[rls55]

I have a 1099-R for multiple rollovers from my Traditional 401k that were direct transferred to both a Traditional IRA and a Roth IRA (all accounts are with Fidelity). The 1099-R box 1 Gross Distribution amount is correct at 85,000. The box 2a Taxable Amount is also correct at 5000 for the conversion to the Roth IRA. Box 7 has Distribution code G, which seems correct. After entering the 1099-R in TT (Mac desktop), one followup question is "Was this money rolled over to a Roth IRA?" The only options are Yes or No for the entire 85,000, but there is no option to designate how much went to Roth. When I answer NO the federal tax is calculated incorrectly by not taking the Roth conversion into account, and the TT form "IRA Info Wks" does not show the correct "2023 conversion contributions taxable at conversion" amount. When I change the answer to YES the federal tax is correct, the the "IRA Info Wks" shows the correct conversion taxable amount but incorrectly shows 80,000 in the "2023 conversion contributions not taxable at conversion". How do I fix this? Shouldn't the followup question allow me to designate the correct amounts to Trad and Roth IRAs?

[dmertz · Accepted solution]

When the Form 1099-R is reporting the sum of rollovers from a traditional 401(k) to both traditional and Roth IRAs, you must split the Form 1099-R into two for entry into TurboTax, one for the portion rolled over to the traditional IRA and the other for the portion rolled over to the Roth IRA.  If you had no after-tax basis in the traditional 401(k) (nothing in box 5 of the Form 1099-R), that would mean one From 1099-R with $80,000 in box 1 and $0 in box 2a for the rollover to the traditional IRA and $5,000 in boxes 1 and 2a for the rollover to the Roth IRA.

(With no after-tax basis in the traditional 401(k) it would have been more straightforward to have rolled the entire amount to the traditional IRA and then done a Roth conversion of $5,000 from the traditional IRA.  That would have resulted in two Forms 1099-R, one for each transaction.)

[rls55]

Thank you for the reply! The solution of splitting the 1099-R into 2 entries had crossed my mind and would certainly achieve the correct final numbers, but wouldn't this be a red flag for an IRS audit if the 1099-R isn't entered as issued? Is TT forcing me to report a 1099-R differently than issued? Would it be better to ask Fidelity if they would issue 2 corrected 1099-Rs with the amounts separated (but I'm doubting they would do this simply because TT can't process the separation correctly)? I'm thinking that this is a bug in the TT software if it isn't allowing the amounts to be separated (as with distribution code 7 where there is a followup question that can separate amounts). 

(You are absolutely correct in the movement of funds. My plan last year was to dollar cost average (remember the 2023 drumbeat of UPCOMING RECESSION) the Roth conversions with monthly direct transfers from 401k to Roth IRA. The $5000 was the initial transfer, but the process was cumbersome as Fidelity requires this to be done by phone. That's why the rest of the year I did the conversions exactly as you described since all the transactions could be done online.)

[rls55]

Thanks again for your help, dmertz. I wasn't aware until further investigation that Form 1099-R is not filed with the tax return unless federal tax is withheld and reported in Box 4. I'm sure you already knew that. So I'm assuming TT will also not efile the separated 1099-Rs ... no tax withheld.  Problem solved, but sure does feel like the software should be written to accommodate this situation. Can't imagine that others haven't encountered this.

[dmertz]

This issue comes up in this forum many times every year.

[Bruce S]

Pretty poor customer service on TT's part since like you say this comes up every year and is obviously a common scenario on 401K rollovers. As discussed in the thread I started about this last year, it would be a very simple fix to implement by adding one or two questions to the interview process, since TT will calculate everything properly if you manually edit the backend worksheets. All they would need to do is add one or two questions to the interview and have that update the worksheets accordingly.