1099R and in-service conversion of after-tax contributions in 401k

Submitted by Susheel Yadav on Mon, 2018-02-26 15:16

I have a question about the tax consequence of in-service rollover of after-tax contributions and the associated pre-tax earnings from my 401k sub-account to my personal Vanguard Roth IRA account. I contributed after tax dollars to my retirement account in 2017. At the end of 2017 I requested the after-tax contributions ($9852) and the associated pre-tax earnings ($407) to be rolled over to my Vanguard Roth IRA account. As expected I received a single check payable to my Roth account administrator (Vanguard) and I promptly deposited the check into my Vanguard Roth IRA account. This month I received my 1099R from my 401k custodian and it doesn’t seem to have any amount as taxable income. Here is the relevant information:

Box 1 (Gross Distribution): $10,259
Box 2a (Taxable amount): $0
Box 2b (Taxable amount not determined): Not checked
Box 2b (Total distribution): Not checked
Box 3 (Capital gain): $0
Box 4 (Federal income tax withheld): $0
Box 5 (Employee contributions): $9852
Box 7 (Distribution code): G
Box 7 (IRA/SEP/SIMPLE): Not checked

Shouldn’t 1099R be showing $407 (pre-tax earnings from my after-tax contributions) as taxable, or maybe have Box 2b Taxable amount not determined checked?

Thanks.

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Permalink Submitted by Alan - IRA critic on Mon, 2018-02-26 15:39

You are corrrect. Box 2a should show 407. This has been a fairly frequent 1099R error for plans, since they process the vast majority of direct rollovers to traditional IRAs where 2a is always 0. Force of habit. You should request a corrected 1099R, and the error is obvious enough that there should not be any resistance. The entry in Box 5 indicates that the issuer at one point did recognize that the distribution was headed to a Roth, otherwise 5 would be empty.

Permalink Submitted by Ben Meyer on Tue, 2018-02-27 05:34

In the past some IRA institutions have been reluctant to perform this type of rollover conversion, which they call a “flying conversion”. The reason is probably that they don’t want to become involved in dealing with the differences cited above in reporting by the institution that made the distribution. But the IRS shouldn’t object when you report the rollover conversion even if the 1099-R ifrom the 401(k) plan isn’t corrected. You will be reporting the conversion with $407 as taxable which is larger than the taxable amount of zero as reported in box 2a, so the IRS should have no objection.

Permalink Submitted by David Mertz on Tue, 2018-02-27 13:37

This looks like a Form 1099-R reporting a rollover to a traditional IRA rather than to a Roth IRA. Box 5 would still be expected to show $9,852 even if the rollover was to a traditional IRA, informing the employee that the rollover included $9,852 of after-tax basis. If the plan believes that you requested a direct rollover to a traditional IRA, they will likely be resistant to changing the Form 1099-R.

Permalink Submitted by Susheel Yadav on Tue, 2018-02-27 14:10

I was on the phone with them yesterday and the csr insisted that he has been with the company for 5 years and he knows his stuff, and that my 1099R was in fact correct and I will owe taxes when I withdraw from the Roth IRA! I could not talk sense into him so I gave up and am on the phone again with another CSR today to see if this one understands the problem. I spelled out clearly for him that the form is correct if I were rolling over to TIRA instead of Roth IRA but I am not. Is there a downside to reporting the taxable income as $407 even without having the correct 1099R?

Permalink Submitted by Susheel Yadav on Tue, 2018-02-27 14:28

So I just got off the phone with the 401k custodian. They researched and came to the conclusion that since it was a trustee-to-trustee transfer, they cannot put a taxable amount and the 1099R is correct. According to them if I want to pay taxes on the pre-tax earnings then they suggested for the future to have the funds distributed out to myself instead of Vanguard and then mail Vanguard the check within 60 days. 401k custodian will withhold 20% taxes IIRC. Sigh…I will go ahead and report $407 as taxable in my tax return and hope for the best.

Permalink Submitted by Alan - IRA critic on Tue, 2018-02-27 15:41

Be sure to keep your 5498 from the Roth custodian. It should arrive by the end of May. It will show that your Roth custodian received the full amount of the 1099R, including the amount in excess of your Box 5 basis.
DMx – In the 1099R Inst. there are separate direct rollover reporting instructions, and they do not appear to include completing Box 5 when the direct rollover is to a TIRA. While that may be an instruction design flaw, in this particular 1099R there would be an inconsistency regardless of the type of destination IRA.

Permalink Submitted by David Mertz on Tue, 2018-02-27 21:40

As prepared, by itself this Form 1099-R could also be interpreted reporting a split rollover under Notice 2014-54 with the pre-tax portion to a traditional IRA and the after-tax portion to a Roth IRA. This could be what the CSR was assuming was being done (and which the CSR may have been doing for years even though Notice 2014-54 only recently made this explicitly permissible), despite the request to roll the entire amount to a Roth IRA.

Permalink Submitted by Alan - IRA critic on Tue, 2018-02-27 22:57

I have seen reports of entry problems when a custodian combines a qualified rollover contribution per 408A(e) with a direct rollover on a single 1099R. The Box 2a and 5 instructions for each differ. These problems have been resolved by the taxpayer by splitting the 1099R into a separate one for each destination, although most people would have trouble doing this correctly. These problems likely differ per tax program vendor.
In any event, this 1099R does not reflect the actual disposition of the rollover contributions so should be corrected.
In this particular case, the funds ended up in the intended type of IRA (Roth), so only the 1099R needs correction. This is easy to fix. Much more difficult to fix are cases where the funds do not land in the right account. This is often caused by the issue of a single check where the IRA custodian splits up the money. If separate checks were issued for each IRA with payee showing “FBO M Jones traditional IRA” or “FBO M Jones Roth IRA” these errors would be greatly reduced. A separate 1099R for each should follow.

Permalink Submitted by Ben Meyer on Tue, 2018-02-27 23:09

The instructions for form 1099-R make it clear that code G can be used with two types of direct rollovers from 401(k) plans, but with different coding for box 2a.
For a direct rollover to a traditional IRA: “Enter 0 (zero) in box 2a for: A direct rollover (other than an IRR) from a qualified plan, a section 403(b) plan, or a governmental section 457(b) plan to another such plan or to a traditional IRA;” (p. 10.) Table at p. 16 specifies coding as code G.
For a direct rollover to a Roth IRA: “For a direct rollover of an eligible rollover distribution to a Roth IRA (other than from a designated Roth account), report the total amount rolled over in box 1, the taxable amount in box 2a, and any basis recovery amount in box 5. (See the instructions for Box 5, later.) Use Code G in box 7.” (p. 5.)
It therefore is important for 401(k) plan recordkeepers to determine the type of rollover distribution being performed, since the 1099-R coding will vary. Clearly the 401(k) plan did not do that correctly here. But the OP should still report the rollover as a converson with $407 as taxable.

Permalink Submitted by Susheel Yadav on Wed, 2018-02-28 15:44

This is very useful! In my communication with my custodian I copied and pasted the direct rollover to Roth IRA bit from 1099R instructions. That should be enough to back up my case. Thanks!

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1099R and in-service conversion of after-tax contributions in 401k

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