Hopefully (?) Simple 1099R Questions

Submitted by David Carrell on Mon, 2023-02-20 19:52

2021 Age 58 I retired after 30+ years in Nov ’21. But no changes or post retirement withdraws, Transfers, Rollovers, etc. made from the account. 401K with Vanguard.

2022 through series of transactions including after tax 401K (not Roth) to IRA rollover (the contributions to Roth IRA and Pretax earnings to TIRA), 401K to Roth IRA ($100K), two separate stock NUAs (two different employer stocks) into two different CMA accounts with a different company (ML), move pre-tax 401K “cash” to TIRA via check (direct to ML), and an In Kind move of company stock (pre-tax) from 401K to TIRA ($300K).

The above $’s figures are not exact. The total distributed $’s was ~$4 million. The transactions were largely done one at a time on different days to make it easier to keep track of all the moving pieces and help make sure correct $’s always went to correct accounts.

Question about 1099R…
The 1099R shows the exact correct amount distributed as the gross distribution in box 1, ~$4 mill. In box 2, taxable amount, it shows $400K. 100K of this amount is/should be the pretax 401K to Roth IRA moves (2 separate moves of $50K each.) The other $300K (slightly more that that) exactly matches the In Kind move from 401K (pretax) to TIRA. All of the moves were direct either via check or electronic transfer from VG to ML.

Why is this $300K shown as taxable? (I understand the other $100K from the pretax to Roth IRA conversion.) Is this simply an error on Vanguard’s part? This in kind transfer was (unfortunately) the one time multiple transactions were done on the same day. On that same day I also to one of the $50K pretax 401K to Roth IRA moves. I suspect (hope) this was the reason the error was made since that $50K definitely should be taxable. This ~$300K in kind move matches exactly (to the penny) the unexpected taxable amount.

1. Is this simply an error by VG?
2. If, so I assume I contact them and they issue a corrected 1099R?
3. If not, is there a form I need to complete to correct this error? 5329? 8606? Other?

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Permalink Submitted by David Mertz on Mon, 2023-02-20 20:11

What is the code in box 7 of the Form 1099-R the includes the in-kind rollover of the $300k of company stock? If it is not code G, it implies a taxable distribution that is only made nontaxable by reporting on your tax return an indirect rollover to the traditional IRA. (I don’t know why Vanguard would have done this as an indirect rollover, that wouldn’t make much sense.) If the Form 1099-R has code G, a nonzero taxable amount in box 2a implies a direct rollover to a Roth IRA.

Permalink Submitted by David Carrell on Mon, 2023-02-20 20:24

Box 7 shows a code of G

Permalink Submitted by Alan - IRA critic on Mon, 2023-02-20 21:59

Having a 401k with after tax non Roth basis and also NUA employer shares can create questions about where the after tax dollars are applied. If applied to the cost basis of the NUA shares, Box 2a of the 1099R coded 1 or 7 will be lower, but 2a of the direct rollover G coded 1099R will be accordingly higher for amounts rolled to a Roth IRA. You should have 2 1099R forms which are coordinated correctly. You should also check your brokerage account and both IRA types to verify if all distributions went to the accounts you requested.

Permalink Submitted by David Carrell on Mon, 2023-02-20 22:37

I agree that multiple 1009R’s would make much more sense and be easier to understand.
Agree that the NUA $’s will be for less. I actually have several NUA questions I intend(ed) to ask for follow up. For now I will add that box 6 is blank. I believe that the the NUAs should be reported here. But again, those questions are to follow. But neither the NUA basis nor NUA total amount of basis plus appreciation total to significantly less than the $400K “taxable” amount in 2a
I had ASSUMED (likely incorrectly) that the code G in box 7 was related to the after tax 401K to Roth IRA transaction. This was about $25K.
I went through my transactions records and confirmations for both the VG 401K and the ML accounts involved. Every confirmation at VG had the correct account number and every record at ML showed they were credited to the correct account.
In particular the day where one pretax 401K to Roth IRA (basically a conversion) for $50K and the In Kind Rollover of the stock from pretax 401K to TIRA, show the correct account numbers on the VG confirmation and they were credited to the correct ML accounts. This has been verified by all records.
The $50K “conversion” should be taxable (was a direct rollover and on the confirmation was noted as going into a Roth IRA as it should show).
The $300K In Kind rollover should not be taxable (was a direct rollover in to a TIRA account.) The account number, last 4 digits, was correct and was noted on confirmation simply as an IRA.
I am assuming for some reason, VG is considering the In Kind rollover in to a Roth IRA (thus making it taxable) even though they did not note that the receiving IRA was a Roth. I just assume since both transacitons were on a single confirmation, someone coded both at taxable.
This kind of confusion/error is why I did one transaction at a time except for this one day. It was the VG associate who suggested doing both at the same time.
Ongoing TIA
Let me add…no other transaction or even combination of transactions totals to the value of the in kind stock rollover. The value of the in kind rollover plus the total of $100K in “conversions” to Roth IRA (which I agreee are taxable) EXACTLY to the penny match the 1099R box 2a. This is why I am 99.9% certain it is this in kind rollover that is being considered as taxable.

Permalink Submitted by Alan - IRA critic on Mon, 2023-02-20 23:05

But you do have a separate 1099R for the NUA share distribution, correct? It should show the taxable cost basis of the shares in 2a, and the NUA amount in Box 6. Is there anything in Box 5? Box 7 should be 2 or 7. I want to confirm that this particular 1099R is correct so we can eliminate the NUA distribution as affecting the G coded 1099R in any way.
If there is an error, you will have to file an extension if VG cannot correct any erroneous 1099R forms by early April. It will probably take them considerable time to examine their input info for the 1099Rs. As it stands I assume that your research indicates that 2a of the G coded 1099R should show 100k.

Permalink Submitted by David Carrell on Tue, 2023-02-21 01:12

Actually no, I do not have any 1099 for either NUA. This was something that also confused my that I intended to explore here after the $300K issue was resolved.
I have 1 1099R (there is a 2nd one for less than $50 I will discuss below, but for this discussion there is a single 1099R) for the whole ~$4 million. The account was completely emptied in 2022 (as needed for NUAs).
This disbursment was spread over 8 transactions and all 8 are reported on this single 1099R. There are about 5 different kind of transactions, some taxable, some not taxable, included on the single 1099R.
They did not provide any basis value on the associated confirmations either and never actually provided the taxable basis to the other company (ML).
I “knew” what the basis was from prior discussions with VG. The two different company stocks were in 4 different “sub accounts” in the 401K. Two of these sub accounts made sense to use NUA (had a Market/Basis of over 10). To others did not as the Market/Basis was about 2. These two “funds” (to use the VG term) were the source where the $300K in kind rollover shares came from.
I was able, after the NUAs completed, to get VG to send me the official basis information. I was then able to use this form and information to have ML establish the correct cost basis (and LT cap gain status) in the brokerage account.
The confirmations associated with the NUAs (there were two different employer stocks) show the entire amount as taxable on the confirmation from VG.
Both NUAs are included in the total $4 million distributed
None of the NUA $’s are included in the box 2a reported taxable amount
The two are not shown in box 6 of the 1099R where I would expect the NUA gain to be reported
Both of the NUAs included partial shares and were handled slightly differently

The first one the stock was directly transfered in kind to the ML brokerage account but the partial share value was sent as a check to me. It was for about $40. This was the only check from VG that was sent to me. Every other thing went directly to ML in kind or as a check.
This check had federal, but not state, tax withheld. It was also reported on a separate 1099R but only the $40 was reported in both box 1 and 2a. Box 7 distribution code was 2. This 1099R also was $0.00 in box 6 for the NUA amount. This was the only $ withheld by VG on any transaction
The second NUA both the in kind shares and the $’s for the partial share were directly transfered to the ML brokerage account. There was no check for the partial share (about $20 of value).
Also there was no federal withholding
Not sure which is correct or better but I was not worried over the small amount of tax. I just assumed VG associate handled it differently and I will deal with the taxes upon filing. We are talking <$10 so not a meaningful amount to worry about.
As noted above, no basis information was provided for either of these NUAs but I did get the info from VG later and passed it along to ML. Of course I also retained this information for tax purposes if needed.

I am not concerned with filing an extension. I typically need to anyway. My wife runs a small business so usually not all the final info is available to complete by 4/15

It is starting to look like the associates (2 different ones) may have handled the NUAs incorrectly. I assume this is why VG 1099s don’t have any $ in box 6. But the alternative it seems is those distributed shares should have been included in box 2a as taxable distribution. So it seems those transactions taxably just went *poof*. (Not saying this is right.) Seems either the basis should be taxable income (total about $15K) OR the entire amount (about $150k) should be on a 1099R somewhere. Currently this distribution is on the single 1099R but it is all non-taxable.

Specific NUA questions

Should the NUA amount in box 6 be included? {Sounds like both or each NUA should be reported on a separate 1099R(s)
The $ for the NUA should be the appreciation then I pay tax on the total $ less the appreciation as the taxable basis? The amount to pay tax on is pretty clear to me it is how it should be on the 1099R that I question
If VG does not show anything for the NUAs, do I just ignore that income generated until they realize their error?
Does it matter how VG handled the partial shares? Given the small $’s involved I don’t care that they were different unless it causes some kind of reporting issues.

Permalink Submitted by Alan - IRA critic on Tue, 2023-02-21 01:44

There should be a single 1099R for the distribution of stock to your taxable brokerage account. Box 1 should show the gross value at distribution, 2a should show the taxable amount (the cost basis reduced by any after tax contributions assigned by the plan to the employer shares. Such cost basis would show up in Box 5, and the NUA amount in Box 6. Boxes 2a, 5, and 6 must add up to Box 1. The total distribution box must also be checked to signify a qualified LSD of the plan. Without such a 1099R you cannot report any NUA. I assume over 60 days has passed since the NUA shares distribution, but if you keep working on a resolution and it fails, you might still be able to reduce your tax bill by using Rev Procedure 2020-46 to allow you to do a late rollover of the shares or the proceeds from selling the shares to your IRA.
It appears that either your distribution requests were incorrect or were interpreted incorrectly by VG. You have checked your IRA, Roth IRA, and brokerage statements and confirmed that the funds landed in the correct accounts, but the tax reporting unit VG uses appears to have totally botched the 1099R forms.
You might make copies of your IRA/Roth IRA/taxable brokerage statements for the months in which the direct rollovers and other distributions were received. These copies may help VG determine what went wrong and allow then to correct the 1099R they issued, and issue another one for the NUA shares distributions.
I assume that the two different employer stocks were due to a company acquisition or spinoff by the employer. That’s not uncommon and no reason VG should not have been able to report all NUA distributions on a single 1099R.
Is there any reason that your LSD might not have qualified for NUA? Was your triggering event separation from service or reaching 59.5? You did an LSD in 2022, but did you take any distribution in 2021 between retiring and the end of the year? Even if VG thinks that your LSD was not qualified, they STILL must issue a separate 1099R since the shares were not part of any direct rollover.

Permalink Submitted by David Carrell on Tue, 2023-02-21 03:07

Will need to look into Proce 2020-46 if can’t resolve the NUAs issues. But currently all of the 401K is showing as distributed, the NUA shares transferred in kind to the ML brokerage account, they have the correct cost basis at ML. So basically, as currently is I will only pay cap gains on the appreciated gains and the ~$15K would never be taxed since VG never reported the NUA but also did not report the in kind distribution in the taxable amount from the 401K also. So hypothetically, what happens if I just ignore the whole NUA issues? Basically $15K goes untaxed?
Obviously, the NUA transactions were requested over a recorded phone call (standard VG practice). I am 100% certain those recordings would show that I specifically asked for those transactions to be performed as NUAs as I know I specifically used that term. So assume VG just says too late, nothing we can do, what could I (or anyone else) do to protect ourselves? Until the 1099’s are issued months later, I have no way of knowing that VG messed up on their end.
Yes, I have in great detail reviewed all of the transactions on both ends to ensure that VG had and recorded the correct account numbers. I have also verified that the funds/shares were credited to the proper accounts at ML.
I will contact VG to see what they need to review and correct the 1099R issued. If needed I will provide them copies of the ML side of the transactions. Any options to correct things if VG is unable to unwind the problems on their side? The taxes on $300K of income is say $75K. That would not be a huge deal to pay but I would show it as another $300K of income at ML when I pull it out of the TIRA again.
Hopefully, since it was very clear what they did wrong and which transaction it is their won’t be a huge ordeal to clean up. It seems to make sense to me that I clear up the $300K error separately and completely before opening the NUA can of worms because the more pieces movign around at once the more difficult it will be I suspect. Agree?
Yes, the the two stocks were from spin off, then a merger, then another spin off. Luckily I was able to convert all my shares at the first spin off so only two stocks were involved otherwise it could have been 4 different stocks. I agree that VG should be able to handle both the NUAs on a single 1099R. They were the ones that noted I had both stocks available for NUA. But I don’t care if they show as one or two 1099R’s. Right now they are showing it as a zero but on the ML side it is all documented and basis are correct.
No, there is no reason VG should consider teh LSD as not qualified for NUA. Triggering event was separation from service in ’21. I did not take any distributions in ’21 from 401K or any similar account in ’21.
I recieved a lump sum pension in ’21 but that was direct from my company. The standard pension was lifetime annuity but there were alternatives including a joint spouse lifetime annuity and a onetime lump sum option. I chose lump sum check. But this was a old fashioned defined benefit pension to which I never contributed. So I can’t see how this would be considered a similar fund since I had zero input into any aspect of it other than how I wanted it paid out.
Technically if the company went BK, I could have lost that retirement except what the PBGC would pay. I could also loss the lump sum option if the company did not adequately fund the pension plan. Or the company could have chosen to remove that distribution choice. So again, def. not substantially similar
I had a conversation with VG in late ’21. It was the VG associate who told me about the opportunity to exercise the option of NUAs (I had never heard of them prior.) She also noted that the account needed to be entirely emptied in one tax year. Since I wanted to keep some $’s in the 401K in case I needed some $. I knew that once it was in the TIRA, I could not easily access any $ until I was 59 1/2. While I did not expect to need to access any $, I wanted to keep that option open. So I deferred any distributions, withdraws, etc into 2022 since I would reach 59 1/2 in 2022. So I have no reason to believe VG would think the the LSD was not qualified for NUA. In both ’21 and in ’22 (before I decided which lots to exercise as NUA distribution), VG associates look that the account and verified eligibility as well as sharing the taxable basis so I could chose which lots to NUA and which ones to distribute in kind to my TIRAs.
I agree VG needs to issue one or two 1099R’s for the NUA distributions. But currently they are (incorrectly) included as part of the direct rollovers. Again, I have verified that those $’s values are included in the $4 million shown on the 401K 1099R. They are NOT included in the taxable portion of that 1099R (2a) and they are not listed on box 6. But since the funds are correctly accounted for and will be correctly taxed in the future when sold, what is the downside for now ignoring the whole NUA fiasco until the more pressing extra taxable income issue is resolved?

Permalink Submitted by David Mertz on Tue, 2023-02-21 12:16

The distribution of the potential NUA shares being on the code-G Form 1099-R implies that they were rolled over to a qualified retirement account, precluding NUA treatment. To be eligible for NUA treatment the NUA shares would have to be on the code-2 Form 1099-R to indicate that they were distributed to a nonqualified account. This seems to suggest that VG coded those distributions as being rollovers to an IRA at ML rather than NUA distributions. VG will need to correct the code-G Form 1099-R to remove the NUA shares and either correct the code-2 Forms 1099-R or issue another code-2 Form 1099-R showing the distribution of the NUA shares.

Permalink Submitted by David Carrell on Tue, 2023-02-21 17:00

Since the NUAs shares at ML are in a brokerage account, have been assigned the correct basis (~$15K), are shown on the VG confirmation going to a non-IRA account (both by account number and how VG designated the account) and are not being shown as taxable on VG 1099R, what is the down side of first dealing with the $300K rollover error first?
I realize the NUAs should be cleaned up, but that small tax error ($15K of unreported income) is much less concerning than the $300K of taxable income which should not be taxable. I think fixing the $300K error (which will cost me $) should be my initial focus.

Permalink Submitted by Alan - IRA critic on Tue, 2023-02-21 17:33

I think VG needs to review both of these issues at the same time because there is a good chance they are interrelated. Since you did not even get a 1099R for the NUA distribution, and Box 2a of the 1099R (G code) that you recieved is grossly inflated, it appears that VG included values of the shares in the direct rollover 1099R improperly. If so, they need to issue the NUA 1099R and correct the 1099R you received at the same time. It’s always possible that other issues are involved here, but mostly the distributions appear to be miscoded for the tax reporting people. This should be reviewed with specialists only, the average VG CSR probably will not understand the issues.

Permalink Submitted by David Carrell on Sun, 2023-02-26 22:37

Well currently the problem is being worked by VG back office. So far they are only looking at the in kind stock rollover ($300K) issue. After about 2 hours they figured out the same thing I shared here previously. Two $50K conversions to ROTH IRA (taxable as should be) and one $300K In Kind Stock rollover to TIRA (which I still claim should not be taxable). I never even had a chance to get around to discussing the NUAs that are not documented correctly.
(Hint to anyone reading who might be phone customer service…let the customer fully explain what they already know. VG rep spent 2 hours trying to research and find where the $400K in taxable income numbers came from. If he allowed me to explain before he “need to go do some research”, I could have a) told him exactly the transactions to look at and b) also told him he would not be able to do anything since he can’t issue a corrected 1099R anyway. I always knew it was going to beyond the initial phone associate.
Currently still expect VG to realize their error and correct at least the one transaction classification. Not sure if they will review all the transactions and spot the NUAs handled incorectly or not.
Question, if VG doesn’t issue a corrected 1099R, one suggestion was to try and use Rev Procedure 2020-46 as an over 60day rollover. I am not sure how this would work since the stock is already (and always has been) in the correct ML account. It was a direct transfer and ML had no issues accepting it as a rollover. So who would I send the self certification letter to?
Is an alternative fix to attach a forn 4852 correcting the 1099R myself, providing the documentation I have showing the $300K was a in kind rollover from VG to a TIRA at ML (I have both transaction documents) and attaching to my 1040 (along with the “bad” 1099R I suppose?) Hopefully none of this will be necessary and this coming week VG back office responds with all a corrected 1099R

Permalink Submitted by Alan - IRA critic on Sun, 2023-02-26 23:39

As you said, all the funds except the NUA stock has already been rolled over. However, if the 1099R is not correectly issued for the NUA share distribution, 2020-46 might be useful to roll the shares over to eliminate taxes on the gross value of the shares. That self cert form would be sent to ML to accept a late rollover if you cannot utilize NUA because VG does not issue a 1099R (Box 6 etc).
You might offer to provide FG with copies of your IRA statements proving that the 300k was actually rolled into an IRA by direct rollover.
The 4852 is the last resort if VG does not correct the 1099R and issue a correct 1099R for the NUA shares. The IRS contacts VG directly and will then send you the 4852 to complete if VG does not respond correctly.

Permalink Submitted by David Carrell on Mon, 2023-02-27 21:48

What am I missing? I realize the NUAs are messed up in the VG records, but everything is fine on the ML side.
The stocks are in the correct account (Brokerage, cash account)
The stocks at ML have the correct basis assigned, based on data and form VG provided upon my request for it
On the current 1099R, there is no tax or anything associated with the NUAs (I realize this is not correct). But the NUA stock distribution is part of the gross distribution reported in box 1. (Again, I know this is not correct)
So the NUA stock has been “rolled over”, the original confirmation showed it as taxable (but with the wrong amount.)
It seems that somewhere, VG has “lost” the fact that it was taxable. In effect there is currently no NUA amount shown as taxable on the 1099R but the value is included in the gross distribution.
So I don’t understand the “can’t utilize NUA”. I already have, ML has accepted and assigned the correct basis so whenI sell shares I will pay cap gains on the gains only. What is missing, because VG has not recorded things correctly, is the tax due on the original basis of the shares, ~$15K.
The NUA errors and confusion do not have anything to do with the ~$300K VG is showing as taxable. This was confirmed by VG and it matches to the penny that separate transacton which was about 1 month after the NUA was completed.
Until VG realizes they messed up the NUAs (or until I get a chance to show/tell them they did), I am getting the original stock basis for free since none of those $’s are showing up on the 1099R as taxable. What am I missing?

Permalink Submitted by Alan - IRA critic on Mon, 2023-02-27 22:24

You received a direct rollover 1099R that included in Box 1 the total value of everything that was distributed from the 401k. However, the NUA shares were not rolled over, and the 5498 from the IRA custodian will only show the value received by them. There will be a mismatch at the IRS. VG needs to correct this into two separate 1099R forms, one for the IRA rollover in Box 1 with the corrected amount in 2a. Another 1099R showing the value of employer shares distributed to the taxable brokerage, the cost basis of those shares in 2a, and the amount of NUA in Box 6.
If the plan included after tax contributions, the after tax amount would probably be used to reduce the taxable amount in Box 2a of the NUA 1099R.
As I indicated earlier, since VG’s error involved mis allocation of the total distribution, they need to look at all distributions made last year and how they were reported before they make any corrections since both 1099R forms need to be separately correct, but they also have to add up to the correct total amounts distributed. Not sure they will care about where about which accounts the distributions were actually deposited to, but they should.

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