Form 8880 Bug

[BunnyGo]

Hello,

I entered several rollover forms from 1099R this year. Three of the forms had box 7 checked as G, and so TurboTax appropriately didn't include them on form 8880 line 4. One of them (a ROTH) instead had box 7 as type 1, but I indicated to the software (during the follow up questions) that I rolled it over to another retirement account (I redid it just to make sure). The software incorrectly included this rolled over money on form 8880 line 4. 

[BunnyGo]

In case it matters: Box 5 correctly has the entire value of the account (it's the same as Box 1). Box 7 is listed as 1, which seems wrong to me...shouldn't it be B? Even so, I told turbotax that the money was rolled over by me.

[macuser_22]

A code G rollover is not cash distributed to you so it should not be on line 4.

A 1099-R with a code "1" only in box 7 indicated that the account is NOT a Roth.    A code "B" is a distribution from a designated Roth (a 401(k) Roth) and might also have a code 1.   A direct rollover of a designated Roth to a Roth IRA should have a code "H".

Box 5 indicates that the box 1 amount is your contributions.      Are you sure that the box 7 code is not "1B", not just "1"?

[dmertz · Accepted solution]

I suspect that the code 1 Form 1099-R is for a distribution of after-tax money from a traditional 401(k) account and this money was rolled over to a Roth IRA (part of a split distribution with the pre-tax money being directly rolled over to avoid mandatory tax withholding and the after-tax money being indirectly rolled over).  Because it was all after tax (Box 5 = box 1 and box 2a = $0), this rollover was nontaxable.

As far as I can tell, when entered properly by indicating that the entire amount of this distribution was converted to Roth, TurboTax does not include this distribution on Form 8880 line 4.  The test return that I prepared behaved properly in this respect.

[BunnyGo]

Yes, I was surprised it wasn't 1B. But the other response about it being after-tax contributions to a 401(k) rolled over to a ROTH was correct. I'll try and see if I can replicate my bug, or maybe I didn't indicate he ROTH rollover correctly.

[BunnyGo]

Your suspicions are correct about the situation. I'll try and replicate my bug again. I may not have done the ROTH indication correctly, but I definitely checked the rollover to accounts box.

[BunnyGo]

As an update:

The difference occurs on the page where it has 2 choices for me. The second choice is the crucial one:

Choose which of the following applies:

<BunnyGo> rolled over all of this money to an IRA or other retirement account (or returned it to the same account).

<BunnyGo> converted all of this money to a Roth IRA account.

If I select the first one, the money is listed on line 4 of form 8880. If I check the second it isn't. While your answer is correct about how to fix it, I don't see why checking the first option has the money show up on form 8880 at all. Maybe I'm missing something?

[dmertz · Accepted solution]

You are correct.  A bug in TurboTax is being triggered by indirectly rolling over a after-tax money from a qualified retirement plan to a traditional IRA, a perfectly legitimate transaction (although not particularly wise since the recipient of the distribution should have rolled the after-tax money over to a Roth IRA instead, as you did).  Not only does the nontaxable portion (in your case the entire distribution) erroneously get included on the 2019 line of Form 8880, it also gets included twice on line 25 of the 1099-R Summary.  TurboTax simply refuses to treat the after-tax money as having been rolled over to a traditional account.

I just checked and this same bug is present in 2018,  2017 and 2013 TurboTax.  I didn't check other years, but I wouldn't doubt that the bug has been around since well before 2013.

It's impermissible to indirectly roll after-tax money over to a qualified retirement plan like a 401(k) instead of to an IRA, so maybe that has something to do with how this bug came to be.  TurboTax does not ask the type of traditional destination account, so it can't distinguish between permissible and impermissible rollovers of after-tax money to traditional accounts.

Note that since no tax should be withheld on a nontaxable distribution, it's easy to work around this bug by simply entering code G instead of code 1.  With no tax withholding the IRS will be unaware that this substitution was made to obtain the correct result.

I can understand why you initially reported is as rolled over since that's technically what you did.  The term "conversion" is used by the tax code and the IRS only with respect to distributions from traditional IRAs, not for distributions from qualified retirement plans, but TurboTax uses the term "conversion" for any movement of funds from a traditional account to a Roth IRA.

I'll see what I can do to about reporting this bug.

[dmertz]

It appears that this bug has been fixed, so you can now use the actual code shown on the Form 1099-R provided by the payer instead of using the code-G workaround.