pension buyback years of service

Submitted by John Jawor on Mon, 2019-10-21 13:28

Hello,
I have client who has an IRA with my firm. he is seeking to buy back years of service from a municipal pension. At issue is reporting. The Pension firm has no transfer letter . I inquired about a 5498 in the event we did a rollover and personal check to the pension and they state: “The retirement system does not file Form 5498. When the buyback is executed, the member will receive a receipt letter, acknowledging the purchase and stating the amount of creditable service that is added to his account.”

I have never assisted this sort of buyback without a clear transfer form and tax documentation. Would the IRS or his CPA be able to account/ document satisfactorily to the IRS that the money was in fact rolled over from IRA to pension? would that letter be sufficient?

Thanks in advance.



Submitted by Alan - IRA critic on Mon, 2019-10-21 17:31

  • Since only IRA custodians issue Form 5498, when a rollover is done to a qualified plan, the Form 1040 Inst. indicate that an explanatory statement be included regarding the rollover. This even applies when a direct rollover is done generating a G coded 1099R. The IRS apparently does not fully trust the G coding, which can only be used for a direct rollover. That said, the direct rollover is still preferable to taking a distribution and doing a 60 day rollover, since the IRS is probably more likely to question a 60 day rollover when they know that the participant actually received distribution proceeds. A distribution could also trigger default 10% withholding if the request to waive it is not communicated correctly. The IRS can be convinced that the rollover was done, so the issue here it to reduce the chances that they even ask for documentation in the first place.
  • It is also critical that if client’s IRA has basis from non deductible contributions, that the rollover is limited to the pre tax balance in all of the client’s IRA accounts. The pension plan cannot accept after tax dollars from an IRA, and the client will probably be asked to certify that no after tax dollars were included. When a rollover is made to a qualified plan, any after tax IRA dollars come out last, not pro rata.

Submitted by John Jawor on Mon, 2019-10-21 18:04

Thanks, Alan. That is my issue, very little info has been giving or any certification that pretax dollars are in the IRA.   The pension has not asked for any pretax $s certification nor do they have a form to do a direct rollover.  Thank you for the clarification on the 5498s.  That said, client has until end of month before more interest accrues on the buyback and has said to me to do the path of least resistance, which , sadly appears to be him doing a 60 day rollover of the IRA assets to the pension company.  So how would his CPA account for this? 

Submitted by Alan - IRA critic on Mon, 2019-10-21 18:43

  • If client has basis, he should just be careful to not distribute any of it, and be sure to clearly decline withholding on the distribution. The 1099R will be coded 1 or 7 depending on his age. When filing the 1040, CPA should be sure to include an explanatory statement of the rollover. Client should make a copy of the IRA statement showing the date and amount of the distribution, and try to get a statement from the pension plan showing the date and amount of the rollover for service purchase. Keep these for a few years in case the IRS comes back with a request for documentation.
  • I wonder if the plan would provide the payee name to the client for a direct rollover check. The IRA could issue that check and mail it to the client for delivery. That should result in a G coded 1099R.

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