1099-R Says after-tax transfer to Roth is Taxable
I took advantage of the option to roll pre-tax contributions made to a TIRA into my employers 401k (they allow it). I did this specifically so I could transfer the remaining AFTER TAX contributions in the same TIRA (yes, we had co-mingled pre and after tax contributions over the years) to my Roth IRA.
Received two 1099-R’s from Vanguard; first one shows the pretax rollout to the employer 401K as not taxable (correct). The second 1099-R shows the transfer of the after tax amount to the Roth, but as taxable (not correct). Vanguard says they consider all rollouts from TIRA’s as taxable and have no way of knowing or differentiating pre from post tax contributions (Box 2b indicates “taxable amount not determined.” I recall when processing the transfer into my Roth there were popup messages asking me to confirm this was after-tax (eligible) money, so not sure why the 1099-R says all of it is taxable.
How do I address this when I do my taxes (Turbotax), because that 1099-R will be incorrect. I do not see anywhere to designate basis. Do I override whats in the 1099-R on line 2a and indicate zero? Seems that could trigger an audit.
Permalink Submitted by Alan - IRA critic on Wed, 2022-01-26 19:29
The 1099R is not incorrect. By law, IRA custodians must report all non corrective distributions as fully taxable in Box 2a. But the 2a figure is just provisional as indicated by the “taxable amount not determined” box and you will override it by properly filing Form 8606 to report your prior non deductible contributions and also to calculate the portion of your conversion that is taxable or non taxable. The amount you rolled into your employer plan is automatically composed of your pre tax IRA value until that balance is exhausted. The amount left in your IRA is your IRA basis and your most recent 8606 will show your IRA basis on line 14. If that basis (adjusted for any contributions not yet reported on Form 8606) is at least equal to the amount you converted, your conversion will be tax free. The calculations are all done on Form 8606.
Permalink Submitted by Mike Hunt on Wed, 2022-01-26 22:55
So I am up to date on 8606 through 2020, and also will fill one out of 2021. The amount listed as the basis as of 2021 is the exact amount that was transferred into the Roth, so we’re all good? Is there anything special I need to indicate on the 8606?
Permalink Submitted by Alan - IRA critic on Wed, 2022-01-26 23:13
Nothing special, just follow the instructions. Part II of Form 8606 must be completed in all cases, but Part I is only needed in your case if you made a non deductible TIRA contribution for 2021. However, the IRS guidelines for reporting the pre tax IRA rollover to your 401k ask for an explanatory statement of that rollover to be attached to your return. The reason for this is that your 401k will not issue a 5498 reporting the rollover contribution, and the IRS wants to be sure that the rollover was actually completed.
Permalink Submitted by Mike Hunt on Thu, 2022-01-27 16:35
How much detail is expected in these explanatory statements? I have not had to submit one before.
Permalink Submitted by Alan - IRA critic on Thu, 2022-01-27 18:24
Not much. For example, you might state “on xx/xx/2021 I rolled my pre tax IRA dollars in the amount of $y to my employer 401k plan.”