why is my earnings from after tax 401k taxable?

Submitted by Whodiini on Tue, 2019-01-29 06:20

In 2018, I rolled over 2017 after tax contributions in a 401k to a Roth IRA within the same trustee and then rolled over the earnings via a check made out to a different trustee to a regular IRA. Then later in 2018, I did the same thing again with the 2018 after tax ccontributions. I received a 1099-R, where the total amount rolled over (after tax and earnings) was reported in box 1, and the aftertax rollover reported in box 5. The difference, which was the earnings on the aftertax amount, now shows up in the 1040 form as a taxable distribution, even though I rolled it over. Where do I account for the rollover amount? Do I call the 401k trustee and request to correct box 5 to match box 1? Thanks.



Submitted by Alan - IRA critic on Tue, 2019-01-29 18:05

  • No, you call the 401k administrator and tell them they need to split these rollovers into two 1099R forms because the 1099R instructions are different for qualified rollover contributions to your Roth IRA than they are for a direct rollover to a TIRA. This difference lies in the instructions for how to fill Boxes 2a and 5. They evidently combined this into a single 1099R simply because the box 7 distribution code was the same. 
  •  Your incorrect 1040 taxable income is a common result of the combined 1099R. If the plan will not reissue, then you can probably get the correct tax output by entering the 1099R as if it were two forms. One entry for the portion going to the Roth IRA showing all in Box 5, and the other for the TIRA earnings portion, showing nothing in 2a and 5. That should eliminate the taxable income.
  • If you are going to continue with these after tax contributions which are converted (dubbed as a mega backdoor Roth), you can avoid this hassle by simply sending the entire sub account balance to your Roth IRA. Usually the earnings are so small it is easier to pay taxes on them rather than trying to split the rollover.

Submitted by David Mertz on Tue, 2019-01-29 18:29

Many payers refuse to split the Form 1099-R into two, so you may have to split the Form 1099-R yourself to accommodate your tax software.

Submitted by Whodiini on Wed, 2019-03-06 08:01

Based on this advice, I called Fidelity (twice) and requested they split it into two 1099R forms. They refused (twice). they told me that my direct rollover would be considered an IRA contribution and to wait to get a 5498 from the firm that I rolled the aftertax 401k earnings to.  But when I looked into this, the only way it would be a contribution would be if I received a distribution, which I did not.  So do I split the 1099R into two 1099R in my tax software and then explain why these two 1099R do not agree with the one Fidelity sent me?  By doing this, my tax software precludes me from electronically filing because I have generated a form 4852 (substitute 1099R) for the rolled over earnings as well.

Submitted by David Mertz on Wed, 2019-03-06 13:31

  • The IRS instructions for preparing Form 1099-R permit the split-destination rollovers to be combined on a single code G Form 1099-R.  It’s a deficiency of the tax software the makes in necessary for the user of the software to split the Form 1099-R into two.  Splitting the a code G Form 1099-R to accommodate the software does not mean the Form 1099-R from the payer is incorrect, so it’s not really appropriate to submit a substitute Form 1099-R (Form 4852).  Splitting a code G Form 1099-R without using Form 4852 can likely be done without the IRS being aware of the splitting since, without any tax withholding (no tax withholding should ever be present on a code G Form 1099-R), the Form 1099-R details entered would not be transmitted with the e-filing, equivalent to not attaching the form to a mailed tax return.
  • A direct rollover from a 401(k) to an IRA is indeed a distribution from the 401(k) to an IRA (traditional or Roth) and a contribution to the IRA, a rollover contribution.  Rollover contributions are reported on Forms 5498 in box 2, separate from other types of contributions shown in other boxes.

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