401k RMD with Basis rolled into IRA-Cares Act
Taxpayer with Basis withdraws 20k from 401K in 2020, of which 17k was RMD. The 1099R shows 20k in box 1 and box 2 , taxable amount shows 5k, because box 5, employee contributions shows 15k. He properly rolls the 17k RMD over to a IRA.
So…..the 20 k, which includes the 17k RMD has basis. So the rollover of the RMD into the IRA should also have basis. The taxable amount shown on the 1099 R box 2 showing 5k is incorrect. The new IRS form 8915-E, which is used for 2020 Covid related distributions seems to be designed for taxpayers who are less than 59 1/2 who are trying to not have the 10% early withdrawal penalty assessed. 8915-E doesn’t seem to help taxpayers who are in their 70’s, not subject to early withdrawal penalties. Nor does that form seem to help inform IRS that the RMD that was rolled into an IRA should also retain basis.
The basis should be approx 65% of the 17k RMD. The taxable amount of the 1099R is also incorrect, at least as far as the big picture goes. The 401k administrator would have no reason to know that taxpayer rolled the 17k RMD over into an IRA, but on the tax return, the box 2 amount, taxable distribution must be incorrect, because taxpayer rolled 17k of the 20k into an IRA. Taxpayer, being of a certain age, has no earned income.
The only solution we can think of is to override the box 2 entry, taxable amount to enter in the correct taxable amount, and then answer the inevitable IRS CP-2000 letter ,18-24 months from now, asking about the mismatch.
Same for later when taxpayer starts taking distributions from the rollover IRA and wishes to show the non taxable portion of each withdrawal. What a puzzle.
Permalink Submitted by Alan - IRA critic on Sat, 2021-03-06 17:53
8915 E is for reporting a CRD, not for the allowed rollover of amounts that would have been a 2020 RMD had they not been waived. This sounds like the latter, so 8915 E does not apply. Even if taxpayer qualifies for a CRD, rolling nearly all of it indicates that he did not intend to use a CRD for reporting the distribution over 3 years. Please clarify the CRD situation. For example, taxpayer might have missed the deadline to roll back a would be RMD, but then realized that they qualified for a CRD and instead chose to treat the distribution as a CRD.
Return of a would be RMD is reported like any other rollover. The 1099R is correct, but reporting a partial rollover on Form 1040 is treated as if the taxable portion of the distribution are the first dollars rolled over. Therefore, the entire taxable amount of 5k was rolled over, and line 5b of Form 1040 would be 0 with “rollover” entered next to 5b. In other words, this is entirely reported using the rollover rules and there is no need to override the 1099R. The IRA has also received 12,000 of basis, which was a big mistake because that 12,000 should have been rolled over to a Roth IRA tax free. However, having been rolled over to a TIRA account, taxpayer should file Form 8606 to add the 12,000 added IRA basis to line 2 of Form 8606. Unless he already had IRA basis, he will now need to file an 8606 for every future TIRA RMD or other distribution to avoid double taxation on that 12,000.
Please clarify whether an eligible CRD is being reported. 8915 E (CRD) does not apply for a return of would be RMDs (17k) by the 8/31/2020 deadline. I can’t see any need for a CRD here unless taxpayer missed the 8/31 deadline and therefore needs to report a CRD because he qualifies for one and this provides him a way to return the funds after 8/31. Fortunately, there was no withholding involved.
Permalink Submitted by Tom Williams on Sat, 2021-03-06 19:06
Taxpayer had no intention of spreading this over 3 years. Taxpayer was informed by the 401K administrator that had 60 days under the Cares Act to rollover and he did so in a timely manner.Therefore we will report using the normal rollover rules and we will now add the a form 8606 to show basis in the IRA. How are you coming up with 12K? The employee contribution shown on the 1099-R showed 15K (so perhaps that was a typo in your answer?) He got his money in 2 draws, days apart. He gets 15k (of which the 401K admin clearly shows that of the 15K, 10K is return of basis) and then he gets the remaining balance of 5k, which is also basis. So…He gets 20k, but has basis of 15k, but of the 20K, 17k is RMD….Therefore, it stands to reason that some of the 3k that he did not rollover should be taxable, but it shouldn’t be 5K, because he rolled 17k. And some or all of the 17k RMD that was rolled into the IRA should have basis….Im just not sure how you came up with 12k. (Maybe what you are saying is that 15k basis divided by 20k total distribution= 75% and therefore 75%j of 17k RMD rolled into the IRA = 12.75k. Could that be it? Thank you for your response.
Permalink Submitted by Tom Williams on Sat, 2021-03-06 19:57
Furthermore, upon explaining your logic that the 5k of taxable distribution was and had to be part and parcel of the 17k RMD that was rolled over to the IRA, taxpayer objects, saying “How can any part of the 17k RMD that was rolled over to the IRA be taxable. Even though box 2 of the 1099R shows taxable distribution of 5k, taxpayer says how can it possibly be more than 20k Total distribution less 17k of RMD rolled over= possibly 3 k taxable?
Permalink Submitted by Alan - IRA critic on Sat, 2021-03-06 20:11
TP received 20k of which 5k is taxable. Sec 402(c)(2) copied below states that amounts rolled over come first from the taxable amount, then from the non taxable amount. 17k was rolled over and that included all of the taxable portion (5k), leaving 12k of the rollover as non taxable. The 3k that was not rolled over is also non taxable, meaning that of the 15k non taxable amount, 12k went to the IRA and 3k was not rolled over. Line 5a of Form 1040 should show 20k as distributed, and line 5b should show 0, with “rollover” entered next to 5b. In other words, the 1099R is just the starting point showing the distribution. The rollover rule copies below indicates that the 5k all went to the rollover contribution, so the rest is non taxable. 12k of that went to the TIRA and the other 3k was not rolled over and is also non taxable.
402(c)(2) portion: “In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to paragraph (1)).”