Roth 401k Distribution/Rollover 1099R

Submitted by MIKE KRUCHTEN on Tue, 2017-04-04 03:24

I had a client process a partial distribution to himself and rollover remainder of his Roth 401k in 2016. For simplicity will round numbers; Roth 401k had a basis of 79k and earnings of 21k. $80,000 was distributed to him, his 1099R has $80,000 in Box 1 & $1,000 in Box 2a, distribution codes are 2B. I believe this data on this 1099R is accurate. However, the other 1099R for remaining funds($20,000) which were directly rollover into a Roth IRA has the following 1099R data; Box 1 has $20,000 and 2A also has $20,000 with a distribution code of H.

Client’s CPA wants plan to correct 1099R for Roth rollover, plan admin states the 1099R’s are correct. I feel the 80k distribution 1099R is correct but confused as to why the Roth rollover funds of $20,000 which are all earnings 1099R shows the amount taxable but also has Code H? The Roth rollover check was made payable to clients Roth IRA Custodian not to him. The client is not yet 59.5 (currently 58) so realize the Roth IRA rollover is non qualified and a new 5 year wait period must be met for the Roth rollover funds to be tax free since client had no Roth IRA prior to this rollover. I assume the IRA custodian’s 5498 form will offset the taxable amount of $20,000 so plan admin statement of the 1099R being correct may be accurate.

Is 1099R for $21,000 rollover correct? If not and plan not willing to correct how does client show the IRS the Roth rollover should not be taxable on 1040?



Submitted by Alan - IRA critic on Tue, 2017-04-04 04:14

  • The 20,000 direct rollover 1099R is incorrect per the 1099R Inst. Box 2a should be 0 since the earnings are simply being rolled over from Roth to Roth. Since Code H is inconsistent with an amount in 2a, tax programs will have a problem with entering this 1099R. A corrected 1099R should be requested as the CPA indicated. If the plan refuses to correct, the CPA will have to figure a work around with a substitute 1099R. The 2 1099R forms received must be coordinated because the amounts rolled over come first from the earnings in the Roth 401k. The coordination is correct except for the Box 2a error you noted.
  • The 80,000 1099R properly indicates a taxable distribution although client had the option to do a 60 day rollover. You are correct that this 1099R is correct for the boxes you mentioned. However, this 1099R should also show 79k in Box 5. Box 11 should indicate the first year of a designated Roth contribution, and also in Box 11 of the 20,000 1099R, although that data will not help client since he must start a new 5 year holding period in the Roth IRA.
  • Client’s basis in his Roth IRA will be 0 since only earnings were rolled to the Roth IRA. Therefore, any distributions before his Roth IRA is qualified will be taxable and subject to penalty prior to 59.5.

Submitted by David Mertz on Wed, 2017-04-05 01:40

For reference, you or your CPA can provide the plan with page 5 of the 2016 Instructions for Forms 1099-R and 5498.  At the bottom of the first column on that page the instructions indicate that a code H Form 1099-R must have a zero in box 2a.https://www.irs.gov/pub/irs-pdf/i1099r_16.pdf

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