How is a direct rollover of 401 K funds to an individual Roth entered? Is it both 1099-R income and a Roth contribution in deductions?

[cfm123]

I withdrew funds from a traditional company 401 K plan and did a direct rollover to a personal Roth IRA, outside of the company plan. What is the correct way to record this in Turbo Tax ?                                                                                                                                          Is it recorded as both 1099-R income and as a Roth IRA contribution in the deduction and credits section?

Additionally, how is a late tax penalty avoided on the forms? I paid timely estimated 4th quarter FIT taxes on the taxable amount of the December 2018  rollover. 

[dmertz · Accepted solution]

No, it is not a new contribution.  Enter it only by entering the Form 1099-R.  Do not enter anything regarding this transaction under Deductions & Credits.

To avoid an underpayment penalty it might be necessary to annualize your income and deductions on Form 2210 to show that the taxable income resulting from the rollover to the Roth IRA occurred in Q4.  Prepare your tax return first without annualizing to see if you qualify for one of the safe-harbors.  If TurboTax indicates an underpayment penalty, go through the onerous process of annualizing.  TurboTax will give you the opportunity to do so.

[mtiz]

Hi,

I am trying to ensure that I am tracking correctly in Quicken the ROTH amounts.

Studied other posts before asking this question, but could not find my answer. Would appreciate any help.

In 2019, I took an Early Retirement Distribution Option, and selected the option of a 100% rollover of Pre-Tax to Traditional IRA, and 100% After-Tax to a ROTH IRA. I was 56 years old.

In my 2021 TT Deluxe Mac version,  IRA Information Worksheet, line 29, the After Tax Distribution amount  is listed as '2019 conversion contributions taxable at conversion' is this correct? The line 29 wording is 'conversion' I did not convert, I did a direct roll over. 

Details:

For illustration, the total distribution in 2019 was $100k:

Received 2 checks:

1. $90k made out to trustee as Pre-Tax and deposited into a Traditional IRA. 1099-R Box 1 Gross Distribution of $100k, Box 2b is marked 'Total Distribution', Box 7 is G. all other boxes are empty and this is what I entered into Quicken.

2.  $10k made out to me, mailed along with $90k check and deposited into a ROTH IRA. 1099-R Box 1 Gross Distribution $10k, Box 2b, is marked 'Total distribution', Box 7 is 1. all other boxes are blank and this is what was entered into Quicken.

3. I made no other rollovers or conversions in 2019.

I went back to my 2019 TT Deluxe(Windows)  filing, On the "Distributions from Pensions, IRAs, etc" worksheet,:

Line B4  Amount of this distribution that may be rolled or converted to a Roth IRA = $10k

Line B5  Check this box if the entire amount on line B4 above was converted to a Roth IRA, = it is  checked.

Trying to determine if I paid too much tax in 2019 and if my ROTH balances carried forward are correct.

Thank you.

[MarilynG1]

It appears that you entered everything correctly for your 2019 Conversion from a 401K to a Roth IRA, and your 1099-R with Code G makes this a non-taxable distribution.

The questions in TurboTax after entering your 1099-R are very important, so pay close attention to those.

Were you taxed in 2019?  Check your Form 8606 for 2019 and 2020.

Since you received the 10K and then deposited it into the Roth IRA yourself, this is an indirect rollover (direct would be trustee to trustee, with you not handling the funds at all). 

In any case, Form 8606 for Non-Deductible IRAs is not yet finalized by the IRS (expected date is 2/10/2022) which may be causing your issue in preparing your 2021 return. 

Click this link for more info on Federal Tax Form Availability

[Edited 1/13/2022 3:22 pm]

[mtiz]

Hi Marilyn,

Thanks.

I went through my 2019 return, all records. no 8606 was generated, and I can not see any line item where the After-Tax $10k was taxed in 2019.

I also checked my 2020 return, no 8606 either.

Any thoughts on what I can do to have the true nature of the $10k, After Tax and rolled over to the ROTH IRA, and therefore, should never be taxed?

Thanks for your help.

Mike

[MarilynG1]

None of the contributions you make to your Roth IRA should be taxed, unless you take a distribution before the account has been open for five years, or contributed pre-tax funds (which you did not).  The wording 'taxable at conversion' would apply to those funds, if that had been the case. 

The Form 8606 is a tool to help you track your basis in your Roth. 

Click this link for more info on How to Trigger Form 8606. 

Annual contributions to Roth IRAs are capped at $6,000 ($7,000 if you are age 50 or over) in 2021, but since you did a 'conversion' (limits on Roth conversions were eliminated in 2010), you owed no tax. 

Click this link for an article on Roth IRAs. 

[MarilynG1]

The Form 8606 is a tool to help track your Roth IRA Basis.

Here's How to Trigger Form 8606.

Since your 'conversion' was tax-free, you have no tax consequences.  

This article has detailed info on Roth IRAs, and when contributions/distributions would be taxable.  

[mtiz]

Marilyn,

Sorry for circling back on this again.

I have read all of the links that you provided and still have some questions.

1. Related to the 8606, you mentioned this is where ROTH Basis can be tracked, I looked at the IRS submitted form, it only lists Traditional IRA Basis. Did you mean using the Turbotax IRA Worksheet (that feeds the 8606 form) to track my ROTH Basis? Thank you for the links, I did not know that I had to formally track the ROTH Basis or face IRS penalties. I assume the TurboTax IRA Info Wks is sufficient to meet this requirement?

2. Back to the question on my 2019 Pension Pay out(it is an IRA 401 Qualified Pension Plan) After Tax Roll over to a ROTH IRA. I re-opened my 2019 TT Deluxe program and re-did the step-by-step on the 1099R that had the After Roll Over. I also read the 'converted' link in the program for an explanation. My question is this:

A. The $10k is always put into the Line 35 of IRA Info Wks "Conversion Contributions Taxable at Conversion", is this because of the note that says TurboTax considers ALL Rollovers and Actual Conversions to ROTH as  a Conversion and Taxable, even if they wind up not being taxed? As I stated previously, this was not a conversion to a ROTH IRA, it was rolled over to the Trustee. Box 7 Code is 1, is it possible this is where the problem is? I also noticed none of the links specifically talks about Pension Rollovers, they list only (Traditional IRA, SEP IRA or SIMPLE IRA) as the possible sources moved to a ROTH IRA. 

B. I just don't want to have years from now that it is listed as a Taxable Conversion, when it was a Non-Taxable Rollover. I noticed that each year, 5 total years of ROTH conversions are listed, with the first line being the 'Cumulative prior to 5 years ago. Is this used to track if there are movements made before being held for 5 years rule?

Thanks for your help.

[MarilynG1]

 Form 8606 has not yet been finalized by the IRS (expected date is 2/10/2022) which could be affecting calculations for 2021. Click this link for a list of Federal Tax Form Availability

Since we can't see your tax return or other documents in this forum, if you have been converting 'after-tax' funds from a 401K or Traditional IRA to a Roth IRA for the last several years, TurboTax should have generated Form 8606 for you.  

It also seems that you would have been tracking your non-deductible IRA contributions each year on Form 8606.  You may have rolled over from a Pension to a Traditional IRA, then converted to a Roth IRA, which is causing the confusion. 

Click this link for more discussion if this applies to you.

You previously mentioned two 1099-Rs, one with Code 1 in Box 7, and one with Code G in Box 7. Yes, most IRAs are taxable when rolled over to a Roth IRA.  Does your 1099-R with the Code 1 also show a Basis in Box 5 since you were not taxed?

This link has info on Filing Prior Year Form 8606.

I would recommend that you contact a TurboTax Live expert to actually look at your return if you are still having calculation issues after 2/10/2022.