Box 5
I have a client who has just made a Direct Rollover of his 401k to his IRA. The IRA has received the check and coded it as a direct rollaver fron his QP. Client just received his 1099R which had 10,000 in box 5. Since box 5 is after tax money the cleint is asking for the 10,000 to be “transfered” to his Roth. With all the different opinions on how to handle this I’m basically confused at this point on what he can and cannot do. Can he somehow at this point get the 10k to a Roth?
Permalink Submitted by Alan Spross on Tue, 2010-01-26 22:34
Chuck,
The most likely way to get it to a Roth at this point is to convert the TIRA and on the 8606 the client should report the added 10,000 of basis to the TIRA. This will allow the usual pro rate rules between basis and pre tax amounts to determine how much of the Roth conversion will be tax free. Essentially, it is the same as if he had made non deductible TIRA contributions. There is also the possibility of rolling the pre tax IRA balance into a current employer plan and then converting the basis that remains in the TIRA. If that will work, the 8606 still must report the non deductible IRA contribution.
As you know, if tandem conversion and direct TIRA rollover had been done directly from the plan, we would then be debating how and if the pro rate rules needed to apply or not to that conversion, but of course the pro rate factor in the plan will be different from the pro rate factor from the 8606 on an IRA conversion. But once the after tax funds hit the IRA, they cannot go back into the plan.
Permalink Submitted by charles lore on Tue, 2010-01-26 22:53
Alan just to add more detail this 140k check hit the IRA in Dec. Th esystem coded it in correctly as having come from another TIRA. As such the custodian is being flexilble and allowing it to be recoded as a distibution from a QP which it is. If the client wanted to be aggressive and get the 10k box 5 money to a Roth and assuming the custodain is very flexible how can we get the 10k out without it being reported as a taxable distribution?
Permalink Submitted by Alan Spross on Tue, 2010-01-26 23:57
I doubt that it can be done other than by the two indirect methods I posted earlier. The client probably filled out paperwork requesting this direct rollover, so the only error here is in the coding which is being corrected. The funds have long since been deposited into the IRA and have generated earnings or losses. There does not appear to be any error here by the IRA custodian that would provide the client with leverage to request retroactive changes.
Permalink Submitted by charles lore on Wed, 2010-01-27 00:02
Allan thank you for your prompt and insightful response.