Complicated 1099-R: pre-tax and after-tax money

[Anonymous]

Hi all, I have a fairly complicated situation with my 1099-R and TurboTax: 

In 2021, I converted my entire Traditional IRA balance into my Roth IRA. The Traditional IRA consisted of the following funds:

1. $6000 contributed to my Traditional IRA, and immediately converted to Roth IRA (Backdoor) (AFTER-TAX)
2. $3500 that had been recharacterized from my Roth IRA in 2019. I correctly filled out form 8606 for 2019. I should not owe any taxes on this. (AFTER-TAX)
3. $3700 that had been rolled into the account from a separate retirement account (PRE-TAX)
4. $2000 in investment gains. (PRE-TAX)

I am expecting to owe taxes on #3 and #4. Vanguard combined all of these amounts into one 1099-R:

Box 1 shows $15,200, Box 2a shows $15,200, and 2b is checked for ‘taxable amount not determined’ and ‘total distribution’. Box 7 shows code ‘2’ and is checked for IRA/SEP/SIMPLE.

When I enter this information into TurboTax, my tax owed does not change. I’m not seeing a way to show that some of it was pre-tax and some of it was after-tax. 

Thanks for your help!

[JillS56]

If there is an amount in both Box 1 and Box 2a and the amount is the same, then the 1099-R says that the entire amount is taxable.    Simply checking Box 2b does not eliminate the tax obligation.   Is there an amount in Box 5.  Ideally Box 2a should be blank and with Box 2b checked then you could calculate the taxable amount.  If you have an amount in Box 5, your could make the adjustment  by subtracting the amount in Box 5 from the amount in Box 2a and then in TurboTax enter the taxable amount Box 2a of the 1099-R.  

To determine the amount to enter in Box 2a (Taxable amount), subtract the amount in Box 3 Capital gain, and Box 5 (Employee contributions) from the Gross distribution (Box 1) and enter that difference in the Form 1099R screen Box 2a.

You might want to ask Vanguard to correct your 1099-R.  Otherwise, you could adjust the taxable amount, but be prepared to provide the documentation to the IRS to support your adjustment.  It will be highly probable that the IRS will catch this and send you a letter and you will have to be ready to provide your support.

[Anonymous]

The amounts in Box 1 and 2a are the same. 2b is has a check-mark (by Vanguard). There is nothing in Box 5, though. 

[DanaB27 · Accepted solution]

To confirm the $6,000 was a contribution for 2021? If yes, then you will enter the contribution under IRA contributions and make it nondeductible. During the interview you will be able to enter any prior year basis (after-tax funds) you had, that were reported on Form 8606 in previous years (please see steps 9 and 10 when you enter the contribution or steps 11 and 12 when you enter your 1099-R for the conversion).

If your total value of all traditional/SEP/SIMPLE IRA is $0 on December 31, 2021 then only the gains of $2,000 and $3,700 pre-tax funds will be taxable (assuming your 2019 contribution was $3,500 and you enter the recharacterization correctly).

To enter 2021 the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had nondeductible contributions before this tax year
10. Enter the basis from 2019 Form 8606 line 14.
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R distribution/conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. Answer the questions about the basis from prior years (2019 From 8606 line 14) and the value of all traditional, SEP, and SIMPLE IRAs

@Anonymous

[Anonymous]

Thanks for your detailed response, Dana!

I followed your instructions - the wording was slightly different from what I saw (I'm using the online version). And some questions actually did not come up.

There was one step that I had to do something differently: Regarding the 1099-R, step #9, when I selected "I did a combination", TT required that I enter the 1099-Rs (rollover and conversion) separately. This didn't seem correct since the entire process was actually a conversion only. I selected "I converted some or all of it to a Roth IRA" and then I put the full amount of the conversion. 

After I went through the entire process and right before e-filing, I checked the pdf Form 8606 that TT generated and I could see that everything was correct (the conversion, my cost basis, and the taxable amount). 

Thanks again!

[gm42]

I have a similar situation where my 1099-R has a combination of pre and post tax contributions that rolled over and split into a traditional rollover IRA (pre-tax portion) and a roth rollover IRA (post-tax portion). 

However, in turbotax, I don't see any option to split these in the one 1099-R I received, no option that looks like  “I did a combination of rolling over, converting, or cashing out money.” 

It seems to want to put all of the money one way or the other depending on how I answer the "Did you move the money to a Roth IRA?" question. 

Not sure it matters but I'm concerned since the 1099-R has the post-tax amount listed in box 5 of the 1099-R (it does have distribution code of G, direct distribution to qualified plan code too)

[DanaB27]

You will have to split Form 1099-R into two separate Forms for TurboTax to handle this situation. One for the rollover to the traditional IRA and one for the conversion. As long as the total and distributions codes match entering it like this will not cause a problem.

1. Click on "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. Enter the first 1099-R for the rollover into the traditional IRA:
   1. Box 1 Enter amount send to traditional IRA
   2. Box 2b check
   3. Box 5 blank
4. On the "Did you move this money from a 401(k) to a Roth 401(k)?" screen answer "No"
5. On the "Did you move the money to a Roth IRA?" screen answer "No"
6. Enter a second 1099-R for the conversion to Roth IRA:
   1. Box 1 Enter amount send to Roth IRA
   2. Box 2b check
   3. Box 5 enter amount listed on Form 1099-R
7. On the "Did you move this money from a 401(k) to a Roth 401(k)?" screen answer "No"
8. On the "Did you move the money to a Roth IRA?" screen answer "Yes"

@gm42