Basis for After Tax contributions rolled over to TIRA from 4
I rolled over $5000 of after tax contributions from my employer 401k plan to a TIRA in 2009, while still employed with the company. The plan separately accounted for after tax contributions. To simplify, I had $10000 of elective deferral and $5000 of after tax contributions (worth $5000 and cost $5000). I selected the box asking for after tax contributions to be rolled over. We are not allowed to remove elective deferral while still employed. I subsequently received a 1099R with $5000 of gross distributions and $5000 of employee contributions in box 9b. I included the $5000 in my basis on my 2009 form 8606. The $10,000 of elective deferral remained in the 401k account.
Question: Did my employer handle this correctly on the form 1099R?
Permalink Submitted by Alan Spross on Fri, 2010-04-30 02:46
The 5,000 should have been shown in Box 5, but entering it in 9b should not affect the status of clearly being after tax contributions. Therefore, there is no need to push for a revised 1099R. Did you have a filing or tax software issue because of this?
Perhaps you should have converted this directly to a Roth IRA, or if your income was too high in 2009, waited until January when the income limit disappeared. Your 8606 basis in your TIRA will now be subject to the pro rate rules for future distributions or conversions.
Permalink Submitted by Joe Blow on Wed, 2010-05-05 01:37
Thanks. I did not have an issue with my software, but the IRC Notice 2009-68 leaves to me wonder if my employer was to prorata the basis across both pretax and post tax contributions. I found the following in IRC NOtice 2009-68 that makes me wonder if my basis in box 9b (or 5) should have only been one-third of the $5000 (given $5000 of the $15000 was rolled over): “If your payment includes after-tax contributions
After-tax contributions included in a payment are not taxed. If a payment is only part of your benefit, an allocable portion of your after-tax contributions is generally included in the payment. If you have pre-1987 after-tax contributions maintained in a separate account, a special rule may apply to determine whether the after-tax contributions are included in a payment. ”
You are correct that my income was too high in 2009, which was the main reason I waited until 2010. I did elect to go through a TIRA rather than Roth to provide a backdoor to recharaterize if there was an issue determining my basis. Does IRC Notice 2009-68 indicate that I was supposed to pro-rata my basis across my total pretax and post tax contributions, or did my employer originally handle it correctly (expect for putting the contributions in the wrong box?). Thanks.
(Also…. I should have mentioned that my IRA’s were all after-tax contributions prior to receiving my rollover of aftertax 401k contributions. As a result, I wasn’t worried about the proration on my 8606 for 2009.)
Permalink Submitted by Joe Blow on Wed, 2010-05-05 01:41
Also…. I should have mentioned that my IRA’s were all after-tax contributions prior to receiving my rollover of aftertax 401k contributions. As a result, I wasn’t worried about the proration on my 8606 for 2009.
Permalink Submitted by Alan Spross on Tue, 2012-02-07 21:51
Since your plan only allowed after tax contributions to be distributed, there should be nothing to pro rate, and there should be no problem. As a result, the added 8606 basis in your IRA should be increased by the full amount of that $5,000. 2009-68 was not intended to require pro rating of funds that are not allowed to be distributed, only those that could be distributed under the plan rules. I DO recognize that 2009-68 or other IRS guidance does not clarify this point in any fashion, but it is the only conclusion that could result when the IRS expects the 1099R to reflect the correct breakdown. The IRS rarely investigates whether a 1099R properly reflects the plan document, they take the 1099R at face value.
Now if the plan allowed you to take distributions of the entire balance, there could be considerable exposure to an IRS ruling requiring pro rating per 2009-68. But even then, the IRS is not likely to retroactively require plans to reissue 1099R forms for a prior year to revise the amount of basis in the appropriate box.
Accordingly, you should be home free for two different reasons. Your remaining balance in the plan will now be considered fully pre tax since the records of the plan should reflect that your entire basis has been distributed, leaving behind only pre tax amounts.