[Updated on January 16, 2023 with screenshots from TurboTax for 2022 tax filing.]
A Mega Backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan after which shifting it to the Roth account throughout the plan or taking the cash out (with earnings) to a Roth IRA.
It’s an effective way to place extra cash right into a Roth account with out having to pay a lot extra tax. Not all plans permit non-Roth after-tax contributions however some estimated that 40% of individuals can do it.
Suppose your plan permits it and also you executed a Mega Backdoor Roth. You’ll obtain a 1099-R from the plan within the following yr. You have to to account for it in your tax return. Right here’s find out how to do it in TurboTax.
Use Downloaded Software program
It is best to do it in TurboTax Deluxe downloaded software program. The downloaded software program is each inexpensive and extra highly effective than on-line software program. In case you haven’t paid to your TurboTax On-line submitting but, you should buy TurboTax from Amazon or Costco and change from TurboTax On-line to TurboTax obtain (see directions for find out how to make the change from TurboTax).
In case you use different tax software program, please see:
Throughout the Plan Or To Roth IRA
You are able to do the Mega Backdoor Roth in two methods — convert throughout the plan or withdraw to a Roth IRA. Changing throughout the plan is way simpler, and lots of plans automate this course of. Transferring to a Roth IRA additionally works. See the earlier submit Mega Backdoor Roth: Convert Inside Plan or Out to Roth IRA?
Right here’s the situation we’ll use for instance:
You contributed $10,000 as non-Roth after-tax contributions to your 401(ok). By the point the cash was transformed to the Roth account throughout the plan or transferred to your Roth IRA, your contributions earned $200. You transformed $10,200 to your Roth account.
I’m utilizing 401(ok) as a shorthand. It really works the identical in a 403(b). Now the entries into TurboTax.
1099-R Entries
Go to Federal Taxes -> Wages & Revenue -> IRA, 401(ok), Pension Plan Withdrawals (1099-R).
If you come to the Retirement Revenue part, reply Sure since you obtained a 1099-R out of your 401(ok) plan.
Sure, you obtained a 1099-R type. Import the 1099-R in the event you’d like. I’m typing it myself right here.
You could have a traditional 1099-R.
In case you import the 1099-R, examine the import fastidiously to verify it matches your copy precisely. In case you sort the 1099-R, remember to sort it precisely.
The earnings portion needs to be in Field 2a. Field 2b “Taxable quantity not decided” ought to NOT be checked. The non-Roth after-tax contributions (the “principal”) needs to be in Field 5. Field 7 ought to present a code G. Lastly, the field “The IRA/SEP/SIMPLE field is checked on my copy of the 1099-R” ought to NOT be checked.
TurboTax needs to verify the IRA/SEP/SIMPLE checkbox just isn’t checked.
Rollover Vacation spot
In case you transformed to Roth throughout the plan, reply Sure right here. In case you took the cash out of the plan to a Roth IRA, reply No.
In case you answered “No” to the earlier query, verify that the cash went to a Roth IRA.
After-Tax Contributions
Reply Sure to substantiate that you simply made non-Roth after-tax contributions to your plan.
TurboTax pulls up the quantity of your non-Roth after-tax contributions from Field 5 of your 1099-R. In case your 1099-R isn’t appropriate, it is best to work along with your 401(ok) administrator to have it corrected.
Not a public security officer, until you really are one.
Not as a result of a catastrophe.
The abstract exhibits your 1099-R entries. Repeat and add any extra 1099-Rs you’ll have.
Confirm on Kind 1040
Now let’s verify you’re solely paying tax on the $200 earnings, not in your $10,000 non-Roth after-tax contributions.
Click on on Types on the highest proper.
Discover “Kind 1040” within the left navigation pane. Scroll up or down in the precise pane to traces 5a and 5b. Line 5a consists of the $10,200 gross distribution quantity. Line 5b solely consists of the $200 taxable quantity.
With a Mega Backdoor Roth, you bought an additional $10k into your Roth account. After paying tax on this $200, the long run earnings on the $10,200 might be tax-free.
If you’re completed inspecting the shape, click on on Step-by-Step on the highest proper to get again to the interview.
Say No To Administration Charges
In case you are paying an advisor a share of your property, you might be paying 5-10x an excessive amount of. Discover ways to discover an unbiased advisor, pay for recommendation, and solely the recommendation.