1099R On 401K Rollover of After Tax Funds
I know that this horse has been pretty well beaten, but I would like to have whatever advice you can offer for my specific situation. At the beginning of 2010 I did an in-service rollover of funds from my company 401K that included approximately 90000 in after tax contributions. I am 63 years old. The Vanguard administrators were very careful to move the before tax amount and after tax amount (not including earnings) separately to a Vanguard TIRA and Roth IRA respectively. I have followed the discussion in this forum and others about the lack of IRS guidance on this type of transfer, but elected to go ahead with it in January and hoped to have clarification before before time to file a return. When the 2010 Form 1099R arrived from Vanguard, the blocks appeared to have been completed as they agreed:
1..Gross Distribution..entire amount of before and after tax funds
2a..Taxable amount..0.00
4..Fed income tax withheld..0.00
5..Employee contributions or insurance premiums..The isolated after tax amount of 90000
7..Distribution Code..G
Ira/Sep/Simple…unchecked
10..State Tax withheld..0.00
11..State..TN
I ran this through the TurboTax program and it showed no tax liability or raised any flags.
My question now is: What are the possible outcomes of leaving this and risking an audit after the deadline to recharacterize the after tax Roth to a TIRA in October 2011? I have the cash to pay the taxes if that decision was made, but I would rather reverse the rollover and combine it with the TIRA.
I was given conflicting verbal advice from the IRS prior to and after doing this transaction…first they said it was OK…later said not OK, but they might change their policy later. The last call was in April of 2010 and I could only shake my head. I appreciate any advice you can give.
Permalink Submitted by Alan Spross on Fri, 2011-02-11 03:23
The IRS has not done anything to further clarify this issue. I think that since 2010 is done and reported per your 1099R you are probably OK as is. The reason is that by not showing a taxable amount in Box 2a, the IRS does not know which type of IRA received the direct rollover unless they match the 5498 received separately with this 1099R.
The conflicting advice you received from the IRS is a symptom of their failure to reply to repeated requests for clarification of this issue from the American Benefits Council and others. The downside if they eventually rule against you is not costly, so you should file your return as described. If the IRS decides to make their rulings this year, I think that they will be applied for 2011 and beyond, but chaos would be created if they went back and attempted to reconstruct all of these that were done from 2008 through 2010. Direct Roth conversions were not possible prior to 2008. The IRS has issued plenty of Notices, but they leave a major inconsistency between rollovers done directly (Code G) and those done indirectly (Codes 1 or 7).
Re worst case scenario – you would have some after tax going to your TIRA and would file Form 8606 to get credit for them, and part of your Roth conversion would be taxable. If they rule prior to 10/15 you can recharacterize as much of your conversion as you wish and if they rule after that date, I think they would have to extend your opportunity to recharacterize. If they did not do that, you would owe taxes on the taxable portion of the conversion, but the income could be split between 2011 and 2012. But these bad scenarios are unlikely.