Do I owe taxes on 1099-R after rolling over to Roth IRA?

Last year I decided to consolidate all my retirement accounts into a single Roth IRA for simplicity. One of my older accounts had been sitting around for about 5 years and I had completely forgotten about it until I tracked it down at PenFed. I called them and requested they transfer the funds directly to my Roth IRA at Vanguard. I'm almost positive I checked the box for them to withhold taxes since I knew there would be tax implications when moving to a Roth. The transfer went through fine about 3 months ago. Fast forward to today - I just received a 1099-R from PenFed showing the full amount as taxable income with no withholding! The confirmation paperwork I got from the transfer labeled it as a "direct rollover" but now I'm freaking out because it looks like I'll owe taxes on the entire $14,500. Did I mess this up? Is there any way to fix this now or am I stuck paying taxes on money I thought was being handled correctly?

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18 comments

Bethany Groves

•8M

Based on what you've described, you likely did a conversion rather than a rollover. There's an important distinction here: When you move funds from a traditional retirement account (like a 401k or traditional IRA) to a Roth IRA, that's considered a conversion, not a rollover. Conversions are taxable events because you're moving money from a pre-tax account to an after-tax account. The 1099-R showing the full amount as taxable income is actually correct in this case. If the money was coming from another Roth account, it would be non-taxable. But since it sounds like this was from a traditional account at PenFed to a Roth at Vanguard, you do owe taxes on that conversion.

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Bethany Groves

•8M

The withholding is optional on conversions - they should have withheld if you requested it, but that doesn't change the taxable nature of the transaction. It just prepays some of your tax liability. Yes, you could have avoided the immediate tax hit by rolling it into a traditional IRA first. Then you could have controlled the timing and amount of conversion to Roth over multiple years to spread out the tax impact. Many people convert smaller amounts each year to stay in lower tax brackets.

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KingKongZilla

•8M

I went through almost the exact same situation last year. I had an old 403b that I wanted to consolidate with my other retirement savings. I was getting conflicting advice until I found https://taxr.ai which literally saved me thousands in potential penalties. They analyzed my 1099-R and confirmed I had done a conversion rather than a rollover (which is taxable, as others mentioned). But they also found that PenFed had coded my distribution incorrectly on the 1099-R. The distribution code matters a LOT for how the IRS treats the transaction. The site helped me draft a letter requesting a corrected 1099-R with the proper code, which didn't change that I owed taxes, but eliminated the potential early withdrawal penalty the incorrect coding would have triggered.

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KingKongZilla

•8M

They only analyze the documents you upload - no connection to your accounts needed. You just take pictures of your tax documents and their system identifies issues that could cost you money. Super private and secure. No, in my experience calling PenFed directly was useless. I spent hours on the phone with representatives who didn't understand the tax implications. The financial institutions often don't understand the tax side well. With taxr.ai, I got clear guidance on exactly what was wrong and how to fix it. The corrected 1099-R saved me from a 10% penalty on the full amount.

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Nathan Dell

•8M

Just wanted to follow up about the taxr.ai recommendation - I decided to give it a try with my own 1099-R situation. I was skeptical at first but figured it was worth a shot. Uploaded my documents and within minutes the system flagged that my financial institution had incorrectly coded my distribution as an early withdrawal (Code 1) instead of a direct rollover to a Roth (Code 2). This small coding error would have cost me an additional 10% penalty! The service generated a letter I could send requesting a correction, even citing the specific IRS regulations. My financial institution issued a corrected 1099-R within 2 weeks. I still owe the taxes on the conversion (can't avoid that), but saved the penalty. Definitely worth it for the peace of mind alone.

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Maya Jackson

•8M

After dealing with a similar Roth conversion issue last year, I spent WEEKS trying to get through to the IRS to confirm I was handling everything correctly. Literally impossible to reach a human. I finally used https://claimyr.com after seeing it recommended here. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone tree for you and call you back when an actual agent is on the line. Got connected to an IRS tax specialist who confirmed exactly how to report my 1099-R on my tax return and explained the specific forms I needed. The agent even noted in my account that I had called to get clarification in case of any questions later.

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Maya Jackson

•8M

They use a combination of tech and timing to navigate the IRS phone system efficiently. There's no special access - they've just perfected the process of getting through the complicated phone tree and waiting on hold so you don't have to. They're not magic - they're just solving a real problem for people who don't have hours to waste on hold. And plenty of people ARE using it, especially during tax season when IRS wait times are astronomical. I was skeptical too, but when I got the call back with an actual IRS agent on the line after my weeks of failed attempts, I became a believer. Sometimes the simple solutions are the best ones.

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Amaya Watson

•8M

I need to eat my words from my previous comment. After continued frustration trying to get clarification on my own 1099-R situation, I broke down and tried the Claimyr service. I expected to be disappointed, but less than 2 hours after submitting my request, I got a call back with an ACTUAL IRS AGENT on the line. No hold music, no automated system - just straight to a knowledgeable person who answered all my questions about how to report my Roth conversion correctly. The agent explained that I needed to file Form 8606 along with my return to properly document the conversion and confirmed that while I do owe income tax on the converted amount, I don't owe the 10% penalty since it was a valid conversion. Would have taken me days of trying to get this information on my own. Completely worth it.

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Grant Vikers

•8M

Thanks for clarifying! So here's the situation: You did a direct Roth conversion from a traditional IRA. This is 100% taxable but not subject to the 10% early withdrawal penalty. The fact that it was trustee-to-trustee is good - it means you don't have to worry about the 60-day rule. The "Direct Rollover" terminology on your paperwork is a bit misleading since technically this was a conversion, not a rollover. This is common though - many financial institutions use the terms interchangeably even though they have different tax implications.

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Giovanni Martello

•8M

I work at a financial institution (not PenFed) and see this confusion ALL THE TIME. When you request a withholding for taxes, you need to specifically request federal AND state tax withholding. Many people only check one box or don't specify the percentage. Also, check that 1099-R carefully. Box 7 should have a distribution code that tells you a lot. If it's code "1" that's bad news (early distribution, no known exception). If it's "2" that's better (early distribution, exception applies). If it's "7" that's a normal distribution.

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