Roth Conversion 1099
First off, I want to say that the people posting on these boards have been extremely kind and gracious in answering several of my questions. Your willingness to share your knowledge is GREATLY appreciated.
With the said, here is yet another one of my questions:
I got a call from a client’s accountant regarding a roth conversion that she had done. Part of the funds had come from deductible IRA contributions and part came from a non-deductible contribution. For easy conversation, lets say that $5,000 was deductible and $5,000 was not.
The accountant thinks that the 1099 is incorrect because it shows a distribution of $10,000 total, and in the box for “non-taxable portion” (I think he said it was box 5?), it doesn’t say anything. He says that box should say $5,000. Personally, I don’t know how the company could report the taxable vs. non-taxable portion–they don’t keep track of whether contributions are deductible or not, do they? Furthermore, given the pro-rata rules on conversions, it would seem to me impossible that a company would be able to give that information on the 1099. So, is he right or wrong? Should a 1099 for Roth conversion tell the taxable and non-taxable amounts or not?
Thank you SO MUCH in advance for your help!
Permalink Submitted by Alan Spross on Fri, 2011-03-25 02:05
You are exactly right, the IRS custodians do NOT know what a taxpayer’s basis is. Only the taxpayer and the IRS know.
Box 5 is not used for IRA distributions or conversions, but is used in employer plan distributions where the plan administrator DOES know what the basis is.
The taxable portion of the client’s conversion is based on the adjusted year end value of the TIRA, adjusted to add back the conversion amount. The prior year basis from Form 8606 is added to any current year non deductible contributions to determine the pro rate factor for the conversion. Therefore, the correct taxable amount depends on the client having correctly filed Form 8606 in all prior years to report any non deductible contributions. If client failed to do that, the information can be researched and reconstructed and the forms filed retroactively without penalty. The taxable amount also depends not only on the contribution types but also on any earnings or losses generated in any of client’s TIRA accounts.
Permalink Submitted by Jason Frank on Fri, 2011-03-25 02:10
Thank you! You are a lifesaver!
Permalink Submitted by Jason Frank on Fri, 2011-03-25 02:13
By the way, you wouldn’t happen to know where I might find written documentation of that information, would you?
Permalink Submitted by mk foss on Fri, 2011-03-25 05:19
Page 17 in Chapter 1 of Pub 590 tells the taxpayer that they are responsible.
The instructions for Form 8606 indicate that the taxpayer must keep track of their own basis.
Outside of that there is nothing specific that says that the custodians do not keep track – but the law doesn’t require them to do so.
Permalink Submitted by Jason Frank on Fri, 2011-03-25 18:44
Thanks again!