401K to Roth IRA Conversion Reporting

[syoung123]

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.

[VolvoGirl]

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]

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

[syoung123]

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.

[Hal_Al]

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?

[Opus 17]

@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. 

[dmertz · Accepted solution]

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]

@dmertz    Did you mean Traditional IRA in this part?

".......and then do a Roth conversion from the traditional  401(k), which..........

[dmertz]

Thanks VolvoGirl, I've corrected that.

[syoung123]

Thank you all for your replies.  To confirm:

1.  If I can rollover the Traditional 401K directly to a Roth IRA, there won't be a form 8606 or any additional tax forms.  The only thing that would be on the tax return would be - on 1040SR, next to 5b, it would say "ROLLOVER" (and the amount in the 5b box would have the addition of the rollover amount, say $20,000)?

2.  If I wind up rolling over the Traditional 401K to a Traditional IRA, then from the Traditional IRA to the Roth IRA, the tax return would have form 8606, and the box 5b would show "ROLLOVER"?

3.  I would receive a form 5498 (for my record only, from the receiving Roth IRA agent) if it is the #1 scenario, and two form 5498, one for the rollover from 401K to Traditional IRA, and for the rollover from the Traditional IRA to Roth IRA?

4.  What other forma would I get?

Thank you again.

[Opus 17]

You will never generate a form 8606, because you are never putting after-tax money in a traditional IRA, that's the only time that form is created.  

If you do a direct rollover to a Roth IRA, you will get a form 1099-R from the 401(k) plan showing the distribution, and a form 5498 from the receiving account.  The 1099-R is reported on your tax return, the 5498 is for your records (it is not needed for the tax return and the broker will often wait until May to issue it).  The rollover is taxable.  

If you do a direct rollover to a traditional IRA, and then a conversion from a traditional IRA to a Roth IRA, you will get a 1099-R from the 401k and the IRA, and a 5498 from the IRA and the Roth IRA.  Again, the 5498s are for your records, and both 1099-Rs are reported in Turbotax.  The rollover from 401k to IRA is not taxable (but must be reported) and the conversion from IRA to Roth IRA is reported and taxable. 

[dmertz]

1. Correct.  The Form 1099-R would have code G in box 7, the gross amount in box 1 and the taxable amount in box 2a.  If the distribution includes any after-tax money, that would be shown in box 5.
2. Correct.  The Form 1099-R for the distribution from the 401(k) would have code G in box 7, th gross amount in box 1 and zero in box 2a.  If this distribution includes any after-tax money, that would be shown in box 5.  The Form 1099-R for the Roth conversion would show the gross amount in boxes 1 and 2a, box 2b Taxable amount not determined marked, code 2 or code 7 in box 7 depending on your age and the IRA/SEP/SIMPLE box marked.  Form 1040 line 4a would show the gross amount of the Roth conversion and line 4b would show the taxable amount (the same as 4a if you have no basis in nondeductible traditional IRA contributions).  Form 8606 Part II will report the Roth conversion.
3. Correct.
4. The other forms that you would receive are the Forms 1099-R I described above.

[syoung123]

Hello - Thank you again for the additional information.  It appears that a direct rollover from a traditional 401K to a Roth IRA is simpler in paperwork/documents?

1.  From traditional 401K to Roth IRA (one 1099R and one 5498)

    -  One 1099R from the 401K administrator (sender), showing rollover amount of $20,000 (as an example)  in box 1, and 2a (taxable amt) in the same amount.  code G in box 7.  This is fully taxable.

    -  One 5498 from the Roth IRA (receiver), showing the Roth IRA receipt, for recordkeeping only.

    -  Tax return would show the rollover amount of $20,000 in 5b (Pension and annuities, taxable amount), with a notation of "ROLLOVER" (the notation is generated by the TurboxTax software).

2.  From traditional 401K to traditional IRA, then from traditional IRA to Roth IRA (two 1099R and two 5498)

   -  One 1099R from the 401K administrator (sender), showing rollover amount of $20,000 (as an example)  in box 1, and $zero in 2a (non-taxable).  code G in box 7. (non-taxable)

   -  One 5498 from the traditional IRA (receiver), showing the traditional IRA receipt, for recordkeeping only.

   -  One 1099R from the traditional IRA (sender), showing rollover amount of $20,000 (as an example)  in box     1 and 2a (taxable amt) in the same amount.  code 7 in box 7 (I am over 59 1/2).  This is fully taxable.

   -  One 5498 from the Roth IRA (receiver), showing the Roth IRA receipt, for recordkeeping only.

   -  Tax return would show the distribution of traditional IRA (Roth) in 4b, taxable amount of $20,000.  Would it also show the rollover of 401K to traditional IRA in 5a and 5b and say (Pension and annuities), with a notation of "ROLLOVER" (the notation is generated by the TurboxTax software), but zero taxable amount? Like if I have a pension of $30,000 and 401K rollover of $20,000 - would it show $50,000 in 5a, and $30,000 (taxable pension) in 5b?

  -  you also indicated there would be a form 8606 generated, with part II showing the distribution of IRA to Roth IRA?

Thank you again.

[Opus 17]

[removed]

[dmertz]

Opus 17 is assuming that you are doing method 1 which is simplest as long as the 401(k) plan understands that the rollover is directly to a Roth IRA, not to a traditional IRA instead.  Method 2 where the funds are first moved to a traditional IRA requires reporting the Roth conversion on Form 8606.