distribution from traditional 401k with one employer, direct rollover of distribution to roth 401K at new employer

[collegeparent]

Received 1099R from employer #1 for total distribution from traditional 401K (distribution code G). Did direct rollover to Roth 401K at employer #2. IRA/SEP/SIMPLE box not checked. Answered yes rolled from 401K to Roth 401K.  Not sure how to answer whether or not I made after tax contributions (have answered both ways but don't see that it changes anything).              Problem is that the amount of distribution is not showing up as taxable on my 1040. Only shows up in 5A.   5B is 0.  Shouldn't 5B be the same as 5A, so that the amount is taxed since it is going into a Roth 401K. How do I get Turbo Tax to show this?   Am I doing something wrong?

[MinhT1]

You have to indicate in TurboTax that you moved the money to a Roth 401(k).

Enter your form 1099-R by following these steps:

1. In TurboTax Online, open your tax return
2. Click on Federal in the left-hand column, then on Wages & Income
3. Navigate to the list of income categories
4. Locate the section Retirement Plans and Social Security and click on the arrow on the right
5. Click Start next to IRAs, 401(k), Pension Plan Withdrawals (1099-R).
6. Enter your form 1099-R and follow the interview
7. When you arrive to the page Did you move the money from a 401(k) to a Roth 401(k)?, click on the radio button Yes, I moved the money to a Roth 401(k), Roth 403(b) or a 457(b) plan and Click Continue
8. The rollover will then be taxed.

[dmertz]

"Received 1099R from employer #1 for total distribution from traditional 401K (distribution code G). Did direct rollover to Roth 401K at employer #2."

Such a rollover is not permitted.  A distribution from the traditional account in one 401(k)  is only permitted to be deposited into the traditional  account in the other 401(k).  Rollovers from the traditional account in one 401(k) are only permitted to be rolled over to the Roth account in the same 401(k) plan, a so-called In-plan Roth Rollover (IRR).

Because the such an out-of-plan taxable Roth rollover is not permitted, the Form 1099-R from the old 401(k) correctly shows a nontaxable direct rollover to the traditional account in the receiving 401(k).

Ignoring the fact that an out-of-plan taxable Roth rollover is not permitted, you might consider reporting it as if it was done in-plan.  To do so you would have to enter a substitute Form 1099-R (Form 4852) with the taxable amount entered into box 2a accompanied by an explanation, but the explanation would likely tip the IRS off that you did an impermissible rollover.

The proper way to have done this would have been to either do an IRR in the old 401(k) (plan permitting) and then do a Roth 401(k)-to-Roth 401(k) rollover, do a rollover from the traditional account in the old plan to the traditional account in the new plan, followed by an IRR in the new plan.  You could have also directed the old plan to do a taxable direct rollover to a Roth IRA, in which case the Form 1099-R from the old plan would have the taxable amount in box 2a.

[collegeparent]

I received another answer that this type of rollover is not allowed?!

[dmertz]

See Note 8 of Table 1-4 in IRS Pub 590-A:

https://www.irs.gov/publications/p590a#en_US_2024_publink1000270086

Paragraph 402A(c)(4) of the tax code is the paragraph that permits taxable rollovers to a designated Roth account.  The restriction that it must be an IRR derives from paragraph 402A(c)(4)(B):

(B)Distributions to which paragraph applies
In the case of an applicable retirement plan which includes a qualified Roth contribution program, this paragraph shall apply to a distribution from such plan other than from a designated Roth account which is contributed in a qualified rollover contribution (within the meaning of section 408A(e)) to the designated Roth account maintained under such plan for the benefit of the individual to whom the distribution is made.

[collegeparent]

OK, so this was a total screw up but now it is done. Luckily taxes are not filed yet. Is there a way to correct this screw up?

[dmertz · Accepted solution]

One option would be to report it as if it was an in-plan rollover by submitting a substitute Form 1099-R with the taxable amount in box 2a as I described earlier, but who knows if the IRS would accept that (or at least not flag it as a problem).  Assuming that there is no basis in after-tax contributions to either 401(k), the taxable result is the same as if it have been done correctly.

Another possibility would be to treat the original rollover as if it had been a rollover to the traditional account in the new 401(k) as reported on the 2024 Form 1099-R that you received, then file the substitute code-G Form 1099-R from the new 401(k) as if deposit into the traditional account in the new 401(k) had been immediately followed by an IRR (essentially claiming that the new plan failed to provide the Form 1099-R for the IRR).  I'm not sure that this would be a viable approach either, and would probably have an even greater chance of raising a red flag with the IRS.

The technical answer is that this seems to be a failed rollover that would have to be removed as an excess contribution, perhaps followed by a late rollover to the traditional account in the new plan with self-certification under IRS Rev. Proc, 2020-46 that it would qualify for a waiver of the 60-day rollover deadline, further followed by a proper in-plan rollover, plan permitting.  The taxable result would be largely the same except that the taxable income would be reportable on your 2025 tax return instead of on the 2024 tax return because the IRR would be occurring in 2025.  Another technically proper approach would be to do the late rollover to a Roth IRA after the removal of the failed rollover to the designated Roth account.  (A taxable rollover to a Roth IRA is permitted.)  This would at least keep the taxable income in 2024.

As you can see, there is no ideal way to deal with this.  It's unfortunate that many 401(k) administrators don't actually know the rules very well and allow these sort of mistakes to be made.  They should be making sure that a rollover to their designated Roth account actually was a rollover from another designated Roth account, the only kind of rollover to a designated Roth account that is permitted.  There has been at least one other post in this forum this year where the receiving 401(k) allowed such a mistake to be made.

[collegeparent]

Mystery solved! Tonight we went over everything once again. He remembered he had a copy of the blank rollover form from his new 401K. He was able to show me exactly how he had filled it out, which was totally correct (issuing plan account 401K, direct rollover, no Roth included). Then we looked at the portal for his new 401K and saw that when he set it up, he was given two choices for his employee contributions: Roth, or regular (or some such word). He chose Roth. It was an either or choice. Apparently when his distribution check came in, it was just added to what he already had in the Roth with no regards where it had come from. He has emailed the administrator of the new plan and hopefully we can get this resolved soon.

Thank you to everyone who responded!