The taxable amount in Box 2a on the 1099-R is frequently incorrect for Traditional IRA and Roth IRA distributions. This can happen at many investment firms. Read below to see why this is the case, and how to correct it when filing your taxes.
- The taxable portion of a Traditional or Roth IRA distribution is determined by your total amount of after-tax (no deduction allowed) contributions across all investment firms. Betterment does not know if you have made contributions elsewhere.
- The taxable portion of a Traditional IRA distribution is determined by the value of Traditional, SEP, and Simple IRA accounts held by all investment firms, not just Betterment, and Betterment can’t report to the IRS information from other firms. A customer can determine the “true” taxable portion of a Traditional or Roth IRA distribution by following the instructions for and completing Form 8606.
A common error for a customer who makes an after-tax Traditional IRA contribution and converts those funds to a Roth IRA (backdoor Roth IRA contribution) is failing to report the contribution and conversion on Form 8606. If a taxpayer does not file Form 8606, the IRS will likely make a conservative estimate and assume the entire amount of the distribution is taxable (even though that may not actually be true).
Betterment cannot make changes to Box 2a of the 1099-R based on customer requests. It is the customer’s responsibility to determine the appropriate taxable portion when filing their tax return by completing the Form 8606.