Proportional conversion of trad. IRAs to Roth in calendar year

Submitted by Charles Sullivan on Sat, 2020-01-25 00:37

I’m hoping someone can provide help on an issue that I may (or may not) have:

I converted my one/only traditional Ira in mid-2019 to a Roth ira. For purposes of discussion, let’s say it was a $15,000 rollover and my basis was $5000. Separately, I had arranged to take a lump-sum distribution from a pension plan on Jan 2, 2020 and directed that it be rolled over directly into a traditional ira that I had established with the same company that managed the pension (a major financial company). The pension side of the company does show the funds dispersed on Jan 2, 2020. The ira side of the company, however, funded the ira account on Dec. 31, 2019, in some magical time travel of funds within the company. They have issued me an IRS form 8606 showing the account funded in 2019 (for discussion, say ~ $150,000). My concern is that having this second Ira in existence in 2019 will affect my earlier conversion of the other ira to a Roth. I’m aware that conversions have to be funded proportionally from all ira’s but I’m not sure if the fact that at the time of my conversion I only had the one account is good enough to consider that all funds came from there or if it’s a calendar year “thing” and the IRS might consider that this newer ira needs to contribute to the conversion.

To be clear:
— It was not my intention to fund this other ira in 2019 to avoid having this potential issue
— I’m not sure if it is, in fact, an issue
— The financial company realizes they messed up but I, as yet, have no correction from them and it seems they may have no mechanism to correct it.
— Is this an issue that I need to be concerned with if I’m ever audited by the IRS?



Submitted by Alan - IRA critic on Sat, 2020-01-25 01:08

  • If the IRA custodian issues a Form 5498 or perhaps a statement prior to the 5498 that your IRA received a rollover and therefore has an account balance on 12/31/2019, then you have a problem because Form 8606 must reflect that year end balance and it will cause your conversion to be mostly taxable. Note that Form 8606 is issued by you with your tax return, custodians do not issue it. What you said was issued was probably a 5498.
  • I don’t understand how the pension records show that the funds were disbursed after the IRA was funded. Since 1/1 is always a holiday, abnormal bookeeping entries appear from time to time. By now, it is probably too late for the IRA contributions tax records to be altered to push the contribution into 2020, you can always try.
  • Most likely they won’t do it, and the leaves you with the decision to pay the taxes or to NOT list the value of the TIRA on line 6 of Form 8606. Before you have to make that decision, wait another 10 days to see if you get a 1099 R from the pension plan for 2019. If you do, it makes your case tougher. If you do not, then you have a decent reason to omit the TIRA value from line 6 of the 8606, and you can make your case for that when the time comes. 
  • I guess you know by now that you should never have requested this direct rollover right at year end, because you have no control of the plan’s processing procedures or schedule. 
  • In summary, if you do not get a 1099R from the pension plan, use that to convince the IRA custodian to not report a 2019 rollover contribution on Form 5498. This is the form that will cause you problems from the IRS. If the IRA custodian does not agree to hold off on the 5498 until 2020, then you will have to either pay the taxes or take it up with the IRS after they review your return. 
  • I’ll assume that you are not subject to RMDs.

Submitted by Charles Sullivan on Sat, 2020-01-25 01:29

Thanks! Yes, my mistake, it was form 5498 that I recieved, which shows the rollover occurring in 2019. The pension side of the financial company has told me that there is no form 1099 R for this in 2019 but will be issuing it for 2020. The timing was not good on my part — you are correct — but was driven by the date I turned 65 and this pension plan’s requirement that I opt to take a lump sum or else default to annuity payments starting Jan 1.Anyway, I will opt to throw myself at the mercy of the IRS. I have a good, and true, story and have documentation to back it up. Having never been audited, I have no idea how agreeable the Irs is on matters like this however.   

Submitted by Alan - IRA critic on Sat, 2020-01-25 18:03

It appears that your 2019 conversion resulted in a choice between two undesirable outcomes. Either do the direct rollover in 2019 and expose the conversion to tax, or do it in 2020, protect the conversion but then have your pension plan annuitized for life, which would amount to RMDs not eligible for rollover. The only way out of this is the pension plan agreeing to issue a corrected 5498 removing the 2019 rollover contribution, but still allowing you to avoid the annuity and report the rollover in 2020. If they instead issue a 2019 1099R to be consistent with the 5498, your conversion will definitely be taxed. 

Submitted by David Mertz on Sat, 2020-01-25 02:00

  • To be precise, does the 2019 Form 5498 from the traditional IRA show the $150,000 in box 2 (rollover contribution) as well as in box 5 (FMV)?
  • Please respond here as to whether or not you receive a 2019 Form 1099-R for the $150,000 distribution from the pension plan.
  • If this distribution is not reported on a 2019 Form 1099-R but instead will be reported on a 2020 Form 1099-R, that would tend to support your position that the rollover contribution could not have occurred in 2019 and that the 2019 Form 5498 is wrong.  However, the IRS could interpret it as you (or the custodian on your behalf) having used other funds to make an improper rollover contribution and subsequently receiving the distribution from the pension plan to replace those other funds where ever they came from, even those it’s implausible.  So not only would a 2019 Form 5498 showing a rollover contribution in combination with the corresponding distribution being shown on a 2020 Form 1099-R create a problem with the amount on line 6 of 2019 Form 8606, it also creates a problem with substantiating the rollover itself.
  • Of course if the distribution appears on a 2019 Form 1099-R it will be difficult to take the position that the distribution and rollover actually occurred in 2020.
  • [Edit]  It seems that if it was necessary to receive a distribution to avoid annuity payments beginning January 1, the distribution from the pension plan might have been required to occur before January 1.

Submitted by Charles Sullivan on Sat, 2020-01-25 16:04

Responses:– The Form 5498 I was sent for 2019 does show the $150,000 in box 2– The pension department of the financial company has told me in no uncertain terms that there is not, and will not be, a form 1099-R issued for 2019. Their records show the funds dispersed on 01/02/2020. They will issue a 1099-R for 2020 a year from now.The IRA department (of the same company) is the unit that somehow recorded that the IRA was funded in 2019.I am expecting to hear back from the financial company about what, if anything, they can do about this situation.I am somewhat aghast that such a large company has made this type of error. I can’t believe that this issue has no come up for other people in the past. Anyway, they are looking into the situation. I will report back here what they suggest as a resolution. 

Submitted by Alan - IRA critic on Sat, 2020-01-25 18:08

This is very rare. I cannot recall anyone reporting a direct rollover contribution prior to the reported distribution. The IRS only encounters this in reverse – when a 60 day rollover is done and the 1099R is for the prior year and the 5498 contribution is reported in the next year because the actual rollover contribution is made in that year. As it stands, even if you reported the large IRA value on 12/31/2019 and paid the tax on the conversion, the IRS may send an inquiry because they do not have a 1099R to indicate where this rollover money came from.

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