Explanation to IRS of Isolating 401k after-tax for Roth Contribution
I need your ideas on sending the explanation to the IRS suggested in Fairmark http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/split-rollover-methods/ (see Distribution to owner rolled to two IRAs).
In 2012, I followed precisely the Fairmark Scenario 3, taking a full distribution of my entire 401k which had had no previous distributions, and converting (rolling over)the pre-tax amount to the traditional IRA and one week later converting (rolling over)the remaining pre-1987 and post-1986 after-tax amounts to the Roth IRA.
I am in the process of filing my 2012 Federal return and want your ideas in deciding whether to e-file or file by mail. The e-filing system will not permit adding information (such as the explanation recommended in Scenario 3) but I can do so if mailing the return.
I received one 1099R form (Box 1 Gross Dist, Box 2a Taxable Amt, Box 4 Withheld, Box 5 Employee Contributions) for these transactions. All seems normal on the return to be e-filed, i.e. the 2012 Form 1040 shows the gross amount rolled over and the 1099-R Summary shows the non-taxable amount rolled over.
Bottom line, is it better to explain up front in a mailed return or wait to see if the IRS computer will question the e-filed return? Thanks in advance for your ideas.
Permalink Submitted by Alan - IRA critic on Tue, 2013-05-07 18:05
I did not see any recommended IRS explanation to submit, and do not see any benefit to including one. But you must properly report the distribution and rollover on lines 16a and 16b of Form 1040. 16b should not show any amount and “rollover” should be entered next to 16b. No 8606 form applies here. I assume that you came up with separate funds to complete these rollovers despite IRS 20% withholding on the pre tax amount. I highly doubt there will be any IRS inquiry, but in the event you get one, you can explain the process then, ie the date and gross amount of the distribution, date you completed the first rollover to the TIRA and amount of pre tax money per Sec 402(c)(2), and date and amount of the Roth rollover. Note that you and the IRS will receive a 5498 this month showing the rollover contribution for each IRA type.