Learn how to Enter 2022 Mega Backdoor Roth in FreeTaxUSA (Up to date)

[Updated on January 16, 2023 with screenshots from FreeTaxUSA for 2022 tax filing.]

A Mega Backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan after which transferring it to the Roth account inside the plan or taking the cash out (with earnings) to a Roth IRA.

It’s a good 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 you probably did a Mega Backdoor Roth. You’ll obtain a 1099-R kind out of your plan within the following yr. You’ll have to account for it in your tax return.

Right here’s find out how to do it within the cheap on-line tax software program FreeTaxUSA. For those who use different tax software program, please learn:

Throughout the Plan Or To Roth IRA

You are able to do the Mega Backdoor Roth in two methods — convert inside the plan or withdraw to a Roth IRA. Changing inside the plan is way simpler, and lots of plans automate the method. Withdrawing to a Roth IRA additionally works. See the earlier publish Mega Backdoor Roth: Convert Inside Plan or Out to Roth IRA?

Right here’s the state of affairs we’ll use for example:

You contributed $10,000 as non-Roth after-tax contributions to your 401(okay). By the point you transformed the cash to the Roth account inside the plan or transferred it to your Roth IRA, your contributions earned $200. You transformed $10,200 to your Roth account.

I’m utilizing 401(okay) as a shorthand. It really works the identical in a 403(b).

1099-R Entries

Now the entries into FreeTaxUSA. Go to Earnings -> Widespread Earnings -> Retirement Earnings (1099-R). Enter the numbers out of your 1099-R as-is. Ours seems like this:

The gross quantity transformed to the Roth 401k account exhibits up in Field 1. The earnings are in Field 2a. For those who didn’t have earnings in your conversion, Field 2a is zero. “Taxable Quantity Not Decided” below Field 2b is left unchecked. The quantity of your non-Roth after-tax contributions (“the principal”) must be in Field 5. Field 7 has code “G” and the IRA/SEP/SIMPLE field is unchecked.

Go away the remainder on the default except your 1099-R has values in different containers.

Rollover Vacation spot

Reply “Sure” for those who transformed to the Roth account inside the plan. Reply “No” for those who took the cash out of the plan to your Roth IRA

The “No” reply to the query opens up a second query. Verify that you just despatched the cash to a Roth IRA.

That’s it. It’s so simple as that.

Confirm on Type 1040

Now we confirm we’re taxed solely on the $200 in earnings, and never on the $10,000 non-Roth after-tax contributions.

Click on on the “View Type 1040” hyperlink on the right-hand aspect.

A draft 1040 kind pops up. Take a look at Line 5. Line 5a exhibits the gross quantity transferred to the Roth account. Line 5b exhibits we’re taxed solely on the $200 in earnings. For those who didn’t have earnings in your rollover, Line 5b will likely be zero.

Shut the draft 1040 kind popup to return to the interview.