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

[Earlybird]

My understanding is that nothing is going to be updated in Turbotax regarding this.  

[FamilyTaxPrep]

There is one other consideration when determining whether to include the 1099-Q on the tax return for the recipient/beneficiary in connection with the 529 Rollover to Roth treatment: How that connects to the Credit for Qualified Retirement Savings.  We rolled over funds left in our older son's 529 to his Roth and he received a 1099-Q (all properly completed by Virginia529).  However, this amount should be considered a Roth contribution, which permits him to do the calculation for the Savers Credit (he finished college years ago).  As long as you treat this as a rollover in TurboTax, the earnings reflected on the 1099-Q are not taxable and the Savers Credit can use this amount for the calculation.  If you decide not to enter the 1099-Q, you lose the option of showing the Roth contribution when calculating the Savers Credit.

[Hal_Al]

" If you decide not to enter the 1099-Q, you lose the option of showing the Roth contribution when calculating the Savers Credit."

That assumes that TT will somehow automatically enter the Roth contribution from the 1099-Q area. I don't think that's a sure thing.  You still have the option of entering the Roth contribution in the IRA contributions area.

The IRS web site says "Rollover contributions do not qualify for the (Saver's) credit." Although they don't specifically address the 529 to Roth "rollover". https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-cred...

[Hal_Al]

The response I got, from TT, is:

"Enhancement requests such as these are handled post-season, so there will not be an update before then."

[steve202503]

This is a total mess and Turbox tax is giving answer in circles vs fixing the Turbox tax program. 
Tax payers will be on the hook to justify the mismatch and incorrect recording of 529-Account to direct rollover to Roth IRA (Trustee to Trustee).

Turbo tax Premier desktop version should provide step by step instruction to offset 1099-Q amounts to Roth IRA contribution.  

What is the point of using turbo tax (digital solution) if it cannot simply balance 529 rollover (trustee to trustee) to Roth IRA deposit ?

Can someone from Turbo tax escaltes this issue as a high priority item and provide proper resolution with software update vs. giving some answers which does not make sense (garbage answers) ?

Thanks.

[Hal_Al]

Q. Can someone from Turbo tax escalate this issue as a high priority item and provide proper resolution with software update vs. giving some answers which does not make sense (garbage answers) ?

A. No. 

You've got your answer.  You treat it as a rollover or you just don't enter it. You have to verify, by yourself, that you qualify, as there is no qualifying TT interview.

The TurboTax interview doesn't directly cover this, yet (there is a workaround). They're working on it, but it will not be ready for this tax season.  In the meantime, 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 (including a Roth IRA), 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 check the "trustee to  trustee  rollover" box at the 1099-Q screen. 

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”.

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

• $7000 yearly limit
• Beneficiary must have earned income that year of at least the amount transferred
• Your 529 savings account must have been 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
• $35K lifetime maximum (2024 is the 1st year that the Roth rollover is allowed, so this isn't an issue yet)

[MollyShr]

A couple of notes:

* On the TurboTax Home and Business desktop version, I was able to edit the form for the 1099-Q and click that the beneficiary and recipient were the same. I believe that that helped keep it from being listed as taxable.  I had to do that manually, not through the interview.

* I tried entering only the 1099-Q, and it did not impact the taxable income in any way. Unfortunately, the TurboTax IRA Information Worksheet that tracks the basis in Roth IRA contributions did not list any Roth IRA contributions from the 529-to-Roth rollover, and the basis was not updated there.

* I tried adding a Roth IRA contribution for the amount of the rollover, and there was no tax consequences. However, the basis information for the Roth IRA is again wrong since the basis in the rollover is only part of the amount rolled over. The basis information for the rollover is on the 1099-Q form, so TurboTax should be able to compute that correctly (once they update the program).

I would like TurboTax to correctly track my daughter's Roth IRA basis. If that can be corrected, I would be grateful.

[BrittanyS]

I would like to take a deeper look at this. However, I need a diagnostic file which is a copy of your tax return that has all of your personal information removed. This will help us send to developers if an issue does need to be corrected.  You can send one to us by following the directions below:

TurboTax Online:

1. Sign into your online account.
2. Locate the Tax Tools on the left-hand side of the screen.
3. A drop-down will appear. Select Tools
4. On the pop-up screen, click on “Share my file with agent.”
5. This will generate a message that a diagnostic file gets sanitized and transmitted to us.
6. Please provide the Token Number that was generated in the response.

TurboTax Desktop/Download Versions:

1. Open your return.
2. Click the Online tab in the black bar across the top of TurboTax and select “Send Tax File to Agent” *
3. This will generate a message that a diagnostic copy will be created.  Click on OK and the tax file will be sanitized and transmitted to us.
4. Please provide the Token Number (including the dash) that was generated in the response.

*(If using a MAC, go to the menu at the top of the screen, select Help, then, “Send Tax File to Agent”)

 @MollyShr 

[MollyShr]

Here's the token number:  583880740-32372132

In this version, I report the 529-to-Roth both on the 1099-Q and as a Roth contribution. 

It also has the wrong Roth contribution summary basis information if I just report it on the 1099-Q, which is what I think would make the most sense from a user perspective. In that case, the summary has no information about the current year contribution.

[BrittanyS]

This is being reviewed by developers for an enhancement.  We will provide an update soon.  

@MollyShr 

[catonyx]

An update now? A little too late for a lot of us who already filed.

[KrisD15]

According to the IRS:

“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.”

If you had the funds rolled over trustee-to-trustee, they should have known what they were doing and I assume you knew what you were doing to initiate the rollover, so just don't enter the 1099-Q (if you got one) 

It is a non-reportable event. 

[TahoeJeff]

That only works if the amounts are the same. If you withdrew more than the Roth conversion amount, you still have to figure out how to show both, or perhaps reduce the 1099-Q amount by the Roth conversion total. Likely a red flag there however.

[catonyx]

Regarding the comment from KrisD15.  I find this kind of comment so absurd and annoying. The whole purpose of buying TurboTax is for it to guide you so you don't have to know all the gory details. It should ask the questions for eligibility and whatever details such that the program does the right thing. We the purchasers should not have to KNOW all the rules. Or have to search on the web to find out. Or worse enter it wrong and get taxed when you shouldn't have. So, frustrating. It's like your are making excuses for a huge oversight in the  in the program. In other areas, I have been asked questions about a form and then instructed not to enter it. Why should this be a special case? ADMIT IT IS A PROBLEM and  fix it. This is making the program untrustable.

[steve202503]

Regarding the comment from Catonyx

I fully agree with Turbo tax's copout answer vs fixing the basic problem with the software.  Instead of owning the problem they are passing the buck to the user to read all IRS rules etc. 

There are multiple scenarios
1) Happy path : 100% of withdrawals is rolled over as Trusty to Trusty transfer to ROTH IRA in one lump sum amount
2) Multiple withdrawals within a year: 
   a) First withdrawal goes for Tuition payment
   b) Second withdrawal goes for Trustee to Trustee transfer to Roth IRA 

   c)  Third withdrawal is used as Non-Qualified withdrawal

All these scenarios need to be properly programmed in the software to record and balance everything out in a streamlined way vs the user (we all) need to review IRS regulation, maintain offline spreadsheet, and track everything to answer/justify any queries from the IRS.

This is absolutely ridiculous for TT to double down on the users raising the issue vs. them fixing the programming of the software and incorporate all the scenarios.