TurboTax not recognizing qualified HSA funding distribution from Roth IRA

[vegas_man]

Per IRS publication 669:

Qualified HSA funding distribution
A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA.

The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution isn’t included in your income, isn’t deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made.

You can generally make only one qualified HSA funding distribution during your lifetime.

This is not reflected in TurboTax when entering a 1099-R from the Roth IRA that was transfered (distributed) to my HSA. Instead, TurboTax is treating it as income, and thus taxing it. This amount should be reflected on form 8889, line 10 – but it is not. I can confirm this by switching to Forms mode seeing the line is blank.

What is the fix to correct this? Do we need to contact the development team to report a bug?

[dmertz]

Most people don't make HFDs from a Roth IRA since doing so is beneficial only in limited circumstances, so TurboTax does not gracefully handle reporting a QCD from a Roth IRA.  QCDs can only be made from otherwise taxable funds in an IRA, so this means that you can only make an HFD from a Roth IRA if your Roth IRAs are not qualified and you have investment earnings in your Roth IRAs of at least the amount of the intended HFD.

Assuming that the amount transferred form the Roth IRA to the HSA qualifies as an HFD and there is no other distribution included on the code J or T Form 1099-R, you can trick TurboTax into treating it as an HFD by selecting code 2 or code 7 in box 7 of the 1099-R form in TurboTax instead of the code J or code T, marking the IRA/SEP/SIMPLE box and indicate that the amount was paid the HSA.  This will cause TurboTax to include the amount on Form 1040 line 4a but exclude it from line 4b with the HFD notation.  TurboTax will also exclude it from Form 8606.  Because the Form 1099-R shows no tax withholding, the details of the Form 1099-R will not be included in your e-filing, so the IRS will be unaware that you made the substitution of the distribution code.

(If your distribution from the Roth IRA would be a qualified distribution or your earnings are less than the amount paid to the HSA, only the amount of taxable earnings can be reported as an HFD and the remainder would have to be reported as a deductible HSA contribution.)

[vegas_man]

Thank you for the prompt response. I don't understand why I must resort to box 7 code shenanigans to trick TurboTax. An IRA to HSA transfer is a well-documented process both in TurboTax and IRS publications.

Per the IRS, I know the amount is not treated as income and is not deductible. I also know the amount must be documented on line 10 of Form 8889 under Qualified HSA Funding Distributions.

So I enter Forms mode (TurboTax desktop) and go to Form 8889 and right-click on line 10 box A and select Data Source. It tells me that field is populated by form 1099-R line 1f. After clicking the hyperlink, I’m taken to the 1099-R summary. I cannot populate this box and the message above says to use QuickZoom to enter on the 1099-R Worksheet.

So I click QuickZoom and select the 1099-R in question, and Open Form. Then I scroll down to the section titled Insurance and enter the amount in the line for "Amount of health savings account (HSA) funding distribution" and enter the amount of the distribution that when from the Roth IRA to my HSA.

After doing this, no calculations are made for my taxes. TurboTax still treat the 1099-R income as taxable.

Is there something else I need to click or populate in Forms mode to make TurboTax perform the correct calculation and not treat the 1099-R as income?

[dmertz]

Even though the HFD is not taxable, the amount is required to be reported on Form 1040 line 4a but be excluded from line 4b with the HFD notation.  The method that I described is the only way to do it with TurboTax without resorting to overrides which would prevent you from e-filing.  This method simply works around TurboTax's limitation while creating and filing a tax return that is identical in every way to one that would be created and filed if TurboTax supported identifying a code J or code T distribution as an HFD.

When using  code 1 (under age 59½) or code 7 (age 59½ or over) and marking the IRA/SEP/SIMPLE box, make sure to indicate that the amount was paid to an HSA.

[vegas_man]

According to expert "Bill" TurboTax cannot perform the calculation when rolling a Roth IRA over to an HSA: https://ttlc.intuit.com/community/file-with-turbotax/discussion/re-form-1099-r-smart-worksheet-missi...

Can you confirm the workaround you provided is the only way for TurboTax to perform the calculation?

I don't really care on the paper file part, only that the tax is calculated correctly. Thanks again for your help!

[dmertz · Accepted solution]

Since your Form 1099-R has code J and if it reports only the HFD, changing the code to 1 and marking the IRA/SEP/SIMPLE box will result in exactly the same tax return being filed as would be the case if TurboTax supported claiming an HFD from a Roth IRA.

[vegas_man]

Thanks,  we'll give it try. I appreciate the effort, you've been far more helpful than any of the "experts" or TurboTax employees.