Mega Backdoor Roth IRA - How can I get line 5b of the 1040 to show "Rollover"?

[Paul99]

Hi, a client made after-tax contributions to a 401k in 2022 and conducted a direct rollover to a Roth IRA. After inputting the 1099-R, how can I get line 5b of the 1040 to show "Rollover"? I double checked that distribution code G was entered.

[George4Tacks]

What are the codes on this 1099R?

[Paul99]

Hi George: the only distribution code in the 1099R is G. 

[George4Tacks]

I just used this simple input and it worked fine. 

[Paul99]

Thank you. I tried the simple input and when there is $0 taxable amount, then like you, the "Rollover" shows up in line 5b of the 1040. 

However, my client has a small taxable amount of $30 because there are some earnings on the after-tax contributions that are being rolled over to the Roth IRA. For some reason, inputting the $30 taxable amount causes the "Rollover" notation to disappear.

[qbteachmt]

"there are some earnings on the after-tax contributions that are being rolled over to the Roth IRA."

That's now a partial conversion. Too bad it's too late to reverse that part. It should have been left in the account as it doesn't qualify for Roth rollover.

[George4Tacks]

I am also confused by the use of Backdoor Roth IRA. Distribution from a 401K is not typically referred to as Backdoor. I think there is more to this story than is being shared. 

[Paul99]

I am surprised that this is not more commonly known. This should not be confused with a Backdoor Roth IRA. Per Fidelity, a Mega Backdoor Roth IRA requires 2 steps:

(1) making after-tax contributions to your 401(k) or other workplace retirement plan, and

(2) then doing a conversion either to a Roth IRA or Roth 401(k)"

What is a mega backdoor Roth? | IRA conversion | Fidelity

It is also possible to do the rollover with earnings (see below).

How To Enter 2022 Mega Backdoor Roth in TurboTax (Updated) (thefinancebuff.com)

[qbteachmt]

I wouldn't describe it as not commonly known as much as, not commonly used. As I recall, it wasn't until 2006 that you could put post-tax funds into a 401(k) Roth. Now you can have a 401(k) and a Roth 401(k) and even have the employer match got into the Roth 401(k) (paying taxes on the match in the year of the match, of course). Once any movement includes various treatment, though, it starts to be more complex, knowing if it is basis in the destination account, was it basis in the source account, is it a taxable event, are there earnings that get treated differently, etc. Every scenario requires a matrix for evaluation and reporting. Just like those who exercised the 2010 conversion-with-carry-over option are still carrying the result of that choice.