Migration of basis from QRP to IRA

Submitted by Ben Meyer on Tue, 2018-06-19 14:38

When a direct rollover is made from a QRP such as a 401(k) or 403(b) plan having basis to a traditional IRA, the 1099-R issued by the QRP will specify the amount of basis carried out of the QRP and moved to the IRA. This is for a voluntary distribution made after taking the full RMD from the plan for the year in question. The basis carried to the traditional IRA will be reported on form 8606, line 2. However, the instructions for form 8606 are ambiguous as to which year the basis is to be included on line 2. It doesn’t seem reasonable to include the basis on form 8606 in the year of the rollover, since the basis has already figured in the calculation of the taxable portion of the RMD in the qualified plan. If it is included in line 2 of form 8606 in the year of the rollover, it will reduce the taxable portion of the RMD for that same year, which doesn’t seem correct, since it has performed the same function for the RMD under the QRP. Is it correct to apply the basis carried to the IRA to both the QRP and the IRA in the same year? Is there any authority to delay reporting the new IRA basis on form 8606 until the following year, or would that cause a greater issue?



Submitted by Alan - IRA critic on Tue, 2018-06-19 18:00

  • Benn, there shouldn’t be any duplicate application of basis if everything is reported correctly. If the QRP has an after tax sub account balance, the employee should be able to request that the RMD be funded from that account which would make the RMD mostly non taxable. The 1099 for the RMD distribution would report the amount of basis in Box 5.  Unlike an IRA distribution, this basis would be calculated on the actual date of the RMD distribution.
  • However, the 1099R Inst provide different guidelines for direct rollover reporting that are problematic in some ways. Because Box 2a and 5 should be coordinated, and 2a is always 0 for a direct rollover to a TIRA, there is no instruction to enter basis in Box 5. The problem then is even knowing how much QRP basis made it’s way into the TIRA. Perhaps some administrators enter basis in Box 5 anyway, but in other cases the amount of basis transfer would have to be calculated by the participant from plan statements or perhaps provided another way by the administrator. 
  • Whatever the correct amount of basis is included in the direct rollover, it should be added to line 2 of the 8606 the first year an 8606 would otherwise be needed. If this is the first IRA balance, there is no IRA RMD until the following year and therefore line 2 would be filled the following year. But if there was a prior IRA balance, then line 2 would be filled on the current year 8606 reporting the RMD or other distribution from the IRA that year. 
  • To your main question, the basis the plan applied to the RMD would reduce the basis rolled to the IRA and added to the 8606 the next time an 8606 is filed. 
  • Of course, since Notice 2014-54 any basis in the QRP should go to a Roth IRA as part of a split rollover. In that case, boxes 2a and 5 would be completed and the taxable amount of the Roth IRA rollover would be clear.  

 

Submitted by Ben Meyer on Fri, 2018-06-22 14:30

  • There does seem  to be a tax impact in the year that a QRP is rolled over into an traditional IRA in the year of rollover, when both the QRP and the IRA have basis, but of differing percentages.
  • For example, assume that a person has an IRA with a total of $10,000 at the start of the year, with basis of $6,000, and also a 401(k) or 403(b) with a balance of $100,000, and with basis of $40,000.  Also assume that RMDs are being taken, with a divisor of 10 (assumed for clarity of this example, even though not a value in table III). The RMD for the IRA would be $1,000.  The RMD for the QRP would be $10,000, and would have a taxable portion of $6,000.
  • The results of working out form 8606 for the IRA distribution show that the the IRA distribution alone would have a taxable amount of $400 for the IRA RMD of $1,000, assuming that no rollover of the QRP was to be made, and assuming no earnings in the IRA account during the year.
  • But the taxable amount of the IRA distribution would change if a total lump sum direct rollover is then performed to roll the remaining balance of the QRP into the IRA.  The QRP rollover would be performed after taking the RMD from the QRP, but in the same year.
  • After making the rollover from the QRP to the IRA and using form 8606, the same IRA distribution of $1,000 would have a taxable portion of $580.  This compares to a taxable portion of $400 if the rollover from the QRP was not performed.
  • The take-away here is that the taxable portion of the an IRA distribution may change if a rollover is made from a QRP with a differing percentage of basis, either higher or lower.

 

Submitted by David Mertz on Fri, 2018-06-22 16:44

I think that the caution in Pub 590-A is just badly worded.  I think it’s simply intended to say that the rollover itself does not trigger the requirement to file Form 8606 but that the requirement is triggered by something else, generally either a new regular nondeductible traditional IRA contribution or an IRA distribution.  Certainly the rollover has caused the basis from the QRP to reside in the IRA for the year of the IRA distribution and needs to be included as an adjustment on line 2 to properly calculate the taxable amount of the IRA distribution.  This agrees with your comment above.

Submitted by Alan - IRA critic on Fri, 2018-06-22 18:52

  • In this example, whenever the QRP at the time of the IRA rollover has a higher % of basis than the IRA, the taxable amount of the IRA RMD will be reduced, and vice versa.  This is the same math that results in a 401k rollover in the same year of a back door Roth conversion making that conversion mostly taxable.
  • Therefore, the question comes down to the meaning of “duplication”.  The same dollars of basis is used to determine the rate of basis recovery from both plans in that year, but the same dollar of basis is only recovered one time.

Add new comment

Log in or register to post comments