Roth Conversion and reporting to IRS

[kent]

Question on Roth conversion and reporting to IRS. Conversion would be from 401K plan to Roth account. When we do Roth conversion where is the Roth conversion reported for IRS taxes and is this the same Form that gets our Roth conversion documented within IRS.

[gman57]

Form 8606 -- My taxes were pretty simple this year so I used FreeTaxUSA and it fills everything in for you.   (Mine was a partial conversion from traditional IRA to Roth.  I'm not sure about  a conversion from 401k)  ADD: Is it a ROTH 401K or traditional 401K?

[yogibearbull]

Form 8606 is for IRAs, etc. Also for $01k/403b to Roth IRA conversion.

But there is a different (I think simpler) procedure to report in-plan 401k/403b conversions.

"You do not report roll over from 401k to Roth IRA on form 8606, only from Traditional IRA.

You will get a 1099-R from your 401k plan showing the total converted amount (as distributed from the pre-tax 401k under a roll-over code) and the taxable portion of that.

The total amount should show up on your form 1040 line 5a and the taxable portion of that should show up on your form 1040 line 5b.

No other reporting is necessary as the plan is responsible for tracking your after tax basis (as opposed to the IRA where you need to do that yourself using form 8606)."

money.stackexchange.com/questions/156510/what-tax-form-is-used-for-roth-conversion-within-a-401k-not-ira

[liftlock]

Mar 15, 2024 21:37:49 GMT kent said:

Question on Roth conversion and reporting to IRS. Conversion would be from 401K plan to Roth account. When we do Roth conversion where is the Roth conversion reported for IRS taxes and is this the same Form that gets our Roth conversion documented within IRS.

All distributions from tax deferred retirement accounts (401Ks, IRAs etc) are reported by the Custodian / Trustee to the taxpayer and the IRS on Form 1099-R.  This includes amounts transferred between plans which may or may not be taxable events.  The distribution code(s) listed in box 7 of Form 1099-R determine how and where the distribution should be reported on the Form 1040 income tax return.  Generally speaking, all Gross Distribution amounts reported in Box 1. on Form 1099-R will be reported on the Form 1040 in line 4a. IRA Distributions, or on Line 5a. Pension and Annuity Distributions.  The taxable amount of the distributions will be reported on lines 4b. or 5b.  Tax software coded to follow 1040 instructions determines whether the distribution is reported on line 4 or 5.

Form 8606 is used to calculate the taxable and non-taxable amounts of a distribution on a 1040 return, especially when a distribution includes after tax-contributions which should not be taxed a second time.  Normal distributions Code 7 of pre-tax contributions will be taxed because they have never been taxed, whereas after-tax contributions will not be taxed a second time.  Most Roth IRA conversions are going reported as normal distributions code 7 from the account the Roth IRA amounts were converted from.

Funds directly transferred between retirement account custodians for like types of accounts are normally non-taxable events.  Distribution codes G or H on the 1099-R identify these distributions as non- taxable direct rollovers which get reported on Form 1040 Lines 4a or 5a.  $0 is reported as the taxable amount on Form 1040 line 4b. or 5b.  Form 8606 is not used determine the taxable amounts because the entire distribution is a non-taxable event. 

www.irs.gov/pub/irs-pdf/f1099r.pdf
www.hrblock.com/tax-center/irs/forms/reporting-form-1099-r-amounts-as-income/
www.hrblock.com/tax-center/income/retirement-income/reporting-401k-rollover-into-ira/?irclickid=X8FxZNXQPxyPWhK1K%3AUDb30kUkHyL53FW3DURQ0&otppartnerid=2003851&campaignid=af_mcm_1056_1916750&partner_id=1056&dclid=CIHPlOLH94QDFZspTwgd6y4Caw

[kent]

kent ,gman57 ,yogibearbull ,liftlock ,
Thank you everyone for helping me on this question. I just need to clarify, I have a 401K account at Fidelity. I also have a Roth account with them. When I asked them for Roth Conversion they created a temp "Rollover IRA" account. First step was they moved the money from 401k to this Rollover IRA account and then immediately I converted to Roth IRA account.
My accountant is really confusing me on this year Tax return, my rollover amt is not showing up on my 1040 form not sure what he is doing.

[liftlock]

Mar 16, 2024 2:44:42 GMT kent said:

kent ,gman57 ,yogibearbull ,liftlock ,
Thank you everyone for helping me on this question. I just need to clarify, I have a 401K account at Fidelity. I also have a Roth account with them. When I asked them for Roth Conversion they created a temp "Rollover IRA" account. First step was they moved the money from 401k to this Rollover IRA account and then immediately I converted to Roth IRA account.
My accountant is really confusing me on this year Tax return, my rollover amt is not showing up on my 1040 form not sure what he is doing.

It sounds like you should have received 1099-Rs from 2 different Fidelity accounts. One from the 401k and the other from the Rollover IRA account.  What are the distribution codes on your 1099-Rs?  The distribution from the 401K from the Rollover IRA account should have distribution code G indicating a non-taxable direct rollover event. The distribution from the Rollover account to the Roth IRA should have distribution code 7 indicating a taxable event if pre-tax funds were converted to the Roth.   Distribution code H would indicate a direct Roth to Roth rollover, a non taxable event.

It maybe the case that the IRS does not require distribution code G to be reported on the tax return since its a non-taxable event.  Its been a while since I have checked the rules. Your tax account should be able to explain what they have done.

[kent]

liftlock,yogibearbull,

I have a 1099 on 401k side with Code G, I also have a 1099 on Roth IRA account with code 7. I gave everything to accountant including form 5498. Accountant is hung up on form 5498 he thinks it is nondeductible contribution. Below is his reply. Should he be looking at form 5498, I have to say no?


from Accountant "The $1111 was listed as nondeductible contribution because on the Form 5498"


It sounds like you should have received 1099-Rs from 2 different Fidelity accounts. One from the 401k and the other from the Rollover IRA account. What are the distribution codes on your 1099-Rs? The distribution from the 401K from the Rollover IRA account should have distribution code G indicating a non-taxable direct rollover event. The distribution from the Rollover account to the Roth IRA should have distribution code 7 indicating a taxable event if pre-tax funds were converted to the Roth. Distribution code H would indicate a direct Roth to Roth rollover, a non taxable event.

[liftlock]

Mar 16, 2024 15:07:11 GMT kent said:

liftlock ,yogibearbull ,

I have a 1099 on 401k side with Code G, I also have a 1099 on Roth IRA account with code 7. I gave everything to accountant including form 5498. Accountant is hung up on form 5498 he thinks it is nondeductible contribution. Below is his reply. Should he be looking at form 5498, I have to say no?

from Accountant "The $1111 was listed as nondeductible contribution because on the Form 5498"

It sounds like you should have received 1099-Rs from 2 different Fidelity accounts. One from the 401k and the other from the Rollover IRA account. What are the distribution codes on your 1099-Rs? The distribution from the 401K from the Rollover IRA account should have distribution code G indicating a non-taxable direct rollover event. The distribution from the Rollover account to the Roth IRA should have distribution code 7 indicating a taxable event if pre-tax funds were converted to the Roth. Distribution code H would indicate a direct Roth to Roth rollover, a non taxable event.

I am confused by your statement "I also have a 1099 on Roth IRA account with code 7." That suggests you made a distribution from your Roth IRA.  I assume that is not the case.  Did you mean to say that have a 1099-R for your Rollover IRA account showing a code 7 distribution from it?  Based our your earlier post it sounds like it was the distribution from the Rollover IRA account that was converted to your Roth IRA.

In either case you now have a taxable code 7 distribution to report on your income tax return.  The question becomes how much of that distribution is taxable.  One option to report the entire distribution as taxable which is the simplest option to deal with as no further calculations are required.  The second option is to determine the after tax cost basis in the 401K amounts converted to you Rollover IRA, assuming those are the only funds that were in your rollover IRA.   You should be be able to review your 401K contribution records to determine the after-tax amount you contributed to it.  Your tax preparer would use form 8606 to determine the taxable and non taxable portion of your reported IRA distributions.

Your accountant may be correct to be hung up on form 5498.  Form 5498 reports contributions made to a specific IRA account, usually for a specific year.  You don't say what account or what period of time the Form 5498 is for.  If the $1111 on the Form 5498 represents the lifetime after-tax contributions you made to the 401K account you transferred to the rollover IRA account, then that would become the non-taxable cost basis used on Form 8006 for calculating the non taxable portion of the code 7 distribution from your rollover IRA.

I would try to better understand what the $1111 represents. 

Post Edit Update:

Form 8606 can be very time consuming to prepare, especially the first time one makes a taxable distribution from an tax deferred account.  The reason for this is that Form 8606 requires the taxpayer to determine their life time after tax contributions to their tax deferred accounts.  When I retired I spent many hours going though 50 years of tax returns to determine the after tax basis of my IRAs that I needed to determine the taxable portion of my first IRA distribution.  Determining the after tax cost basis of an IRA may not be not something that is cost effective to hire a tax preparer to do.  Once the tax basis is established and the first years distributions is taxed, things become simpler going forward as Form 8606 carries forward the untaxed IRA cost basis from year to year.

The IRS views Form 8606 as being complex enough that volunteer tax preparers doing free tax returns for the needy or the elderly are not certified to prepare tax returns involving Form 8606.  Many taxpayers may not even save the tax records necessary to determine the basis in their IRAs.  Tax payers who can't determine the after tax cost basis in their tax deferred accounts end up having their entire distributions taxed and pay more tax that is required by law. 

[kent]

liftlock,
I am confused by your statement "I also have a 1099 on Roth IRA account with code 7." That suggests you made a distribution from your Roth IRA. I assume that is not the case.
Did you mean to say that have a 1099-R for your Rollover IRA account showing a code 7 distribution from it? ---- Correct
Based our your earlier post it sounds like it was the distribution from the Rollover IRA account that was converted to your Roth IRA.

In either case you now have a taxable code 7 distribution to report on your income tax return. The question becomes how much of that distribution is taxable. One option to report the entire distribution as taxable which is the simplest option to deal with as no further calculations are required. The second option is to determine the after tax cost basis in the 401K amounts converted to you Rollover IRA, assuming those are the only funds that were in your rollover IRA. You should be be able to review your 401K contribution records to determine the after-tax amount you contributed to it. Your tax preparer would use form 8606 to determine the taxable and non taxable portion of your reported IRA distributions.
----- I may end up going with first option and claiming the entire amount. When you say after tax cost basis in the 401K I am assuming you mean 401K Roth monies. Unfortunately I had 401K Roth monies within 401K last year. This January I moved all my 401K Roth monies to my Roth account to make it simple for future. I have to call Fidelity to see if they can help me figure out how much of the money I moved to rollover account last year has any 401K Roth contributions. Thanks for pointing this out.

Your accountant may be correct to be hung up on form 5498. Form 5498 reports contributions made to a specific IRA account, usually for a specific year. You don't say what account or what period of time the Form 5498 is for. If the $1111 on the Form 5498 represents the lifetime after-tax contributions you made to the 401K account you transferred to the rollover IRA account, then that would become the non-taxable cost basis used on Form 8006 for calculating the non taxable portion of the code 7 distribution from your rollover IRA.

I would try to better understand what the $1111 represents.

------Form 5498 is for year 2023, first one is from Rollover IRA, second is for Roth IRA
First form 5498 has following information
2. Rollover contributions …………………………$ 1111
3. Fair market value of account …………..$
7 IRA type ………………………..IRA

Second form 5498 has the following information
3. Roth IRA conversion amount …………………….$1111
5. Fair market value of account ……………………$123
7. IRA type ……………………………………………………Roth IRA

[kent]

liftlock,
I called Fidelity this morning and good news is that all the money I converted to Roth is pre-tax money..

[liftlock]

Mar 18, 2024 2:56:32 GMT kent said:

liftlock ,
I am confused by your statement "I also have a 1099 on Roth IRA account with code 7." That suggests you made a distribution from your Roth IRA. I assume that is not the case.
Did you mean to say that have a 1099-R for your Rollover IRA account showing a code 7 distribution from it? ---- Correct
Based our your earlier post it sounds like it was the distribution from the Rollover IRA account that was converted to your Roth IRA.

In either case you now have a taxable code 7 distribution to report on your income tax return. The question becomes how much of that distribution is taxable. One option to report the entire distribution as taxable which is the simplest option to deal with as no further calculations are required. The second option is to determine the after tax cost basis in the 401K amounts converted to you Rollover IRA, assuming those are the only funds that were in your rollover IRA. You should be be able to review your 401K contribution records to determine the after-tax amount you contributed to it. Your tax preparer would use form 8606 to determine the taxable and non taxable portion of your reported IRA distributions.
----- I may end up going with first option and claiming the entire amount. When you say after tax cost basis in the 401K I am assuming you mean 401K Roth monies. Unfortunately I had 401K Roth monies within 401K last year. This January I moved all my 401K Roth monies to my Roth account to make it simple for future. I have to call Fidelity to see if they can help me figure out how much of the money I moved to rollover account last year has any 401K Roth contributions. Thanks for pointing this out.

Your accountant may be correct to be hung up on form 5498. Form 5498 reports contributions made to a specific IRA account, usually for a specific year. You don't say what account or what period of time the Form 5498 is for. If the $1111 on the Form 5498 represents the lifetime after-tax contributions you made to the 401K account you transferred to the rollover IRA account, then that would become the non-taxable cost basis used on Form 8006 for calculating the non taxable portion of the code 7 distribution from your rollover IRA.

I would try to better understand what the $1111 represents.

------Form 5498 is for year 2023, first one is from Rollover IRA, second is for Roth IRA
First form 5498 has following information
2. Rollover contributions …………………………$ 1111
3. Fair market value of account …………..$
7 IRA type ………………………..IRA

Second form 5498 has the following information
3. Roth IRA conversion amount …………………….$1111
5. Fair market value of account ……………………$123
7. IRA type ……………………………………………………Roth IRA

Kent,

Lets assume your started 2023 with all of your tax-deferred savings in either your 401K or your Roth 401K with nothing in an IRA. For both 401K accounts you want to determine the amount of after-tax contributions you made to those accounts over your life time.  Fidelity should be able to tell you that information, if they held your 401K funds since inception.

All of the contributions made to your Roth 401k are most likely to be after-tax dollars on which income taxes have already been paid.  After-tax contributions made to Roth accounts will not be taxed a second time when they are withdrawn from a Roth account.  But you need to keep track of your after- tax contributions and conversions to your Roth accounts so that you don't pay taxes a second time when you make withdrawals from them.   Note that amounts converted to Roth accounts become after-tax conversion contributions to a Roth and are not taxed a second time when they are subsequently withdrawn.  Amounts converted to a Roth are taxed when converted from a tax deferred retirement account.  The 5498 for your Roth IRA is simply informing you and the IRS that in 2023 you added $1111 in after-tax funds to your Roth IRA via a conversion contribution.  This information will not used in preparing a tax return until you start withdrawing funds from a Roth Account.

In case of your non Roth 401k , most of your contributions are likely to involve pre-tax dollars which have never been taxed.  Pre-tax contributions need to be taxed when they are eventually withdrawn from a tax-deferred account.  However, it is possible to make after-tax contributions to a non-Roth 401K.  After-tax contributions are not taxed a second time when they are withdrawn from a tax-deferred account as long as you keep track of them and can report them as your after tax cost basis on Form 8606 when completing your tax return. If you have made after -tax contributions to your non-Roth 401k you can reduce the taxable portion of the amount withdrawn from your Rollover IRA as reported to you with Code 7 on Form 1099-R.

I think your tax preparer can ignore the forms 5498 for 2023.  The first 5498 is informing you and the IRS about the amounts your rolled over to a Traditional IRA from your 401K.   The one second is informing you and the IRS of the amounts converted to your Roth IRA.  These are the forms that allow you and the IRS to track your contributions, conversions and rollovers of funds among your tax deferred accounts.  Forms 5498 become useful in establishing the after-tax cost basis in your IRAs.

[liftlock]

Mar 18, 2024 13:29:39 GMT kent said:

liftlock ,
I called Fidelity this morning and good news is that all the money I converted to Roth is pre-tax money..

Ok.  That means your entire distribution is taxable and your tax preparer won't have to use Form 8606 to determine the non-taxable amount.

[kent]

liftlock,
I appreciate all the help you provided me. Thank you