Rollover reporting of both pre-tax and post-tax on 1040

Submitted by Mahmood Malik on Tue, 2021-03-16 02:50

Hello,

1. I received lumpsum distribution of pensions and were given option for direct rollover (where checks were written out to Custodian with FBO to my name).
2. I received 2 checks and here is breakdown of those 2 checks (with two 1099s) as reported on 1099.
Check# Total Amount After-Tax amount(Col #5)
#1 176,633.74 8,730.22
#2 9,184.15 453.93
Total ————— ————-
185,817.89 9,184.15 Check#2 = After-Tax Contribution Amount
3. I rolled over check#2 to Roth and Check#1 to Traditional IRA.
4. I am planning to report on 1040 on (5a) 185,817.89 and (5b) 0.0

Am i right in rolling over (#3) and reporting (non-taxable) in #2?

If i go by 1099s, then i will have to:
a) change (5b) to 8,730.22 (instead of 0.0) and
b) Track basis in Traditional IRA for the amount 8,730.22 (as that is after-tax amount).

I will appreciate feedback. Thanks.
Mahmood



Submitted by Alan - IRA critic on Tue, 2021-03-16 03:51

What is the amount in Box 2a for of each 1099R forms, also Box 7?  In addition to “FBO you” on each check, does either check indicate payable to IRA or Roth IRA?

Submitted by Mahmood Malik on Tue, 2021-03-16 04:14

Amount in Box 2a is zero for both checks
Distribution code is G for both checks,
Background information: We were to pick ONLY ONE of three options for  entire lumpsum:#1. Rollover to Traditional IRA#2. Rollover to Roth IRA#3. Cash out

Submitted by David Mertz on Tue, 2021-03-16 12:04

These Forms 1099-R make it appear as though there were two independent distributions, not a single distribution split to two destination accounts, each requested to be a direct rollover to a traditional IRA despite one of the checks being deposited into a Roth IRA.  However, the fact that the box 5 amount each Form 1099 is exactly the same proportion of the box 1 amount, it seems clear that these distributions came from the same account, so it doesn’t seem to make sense that there are two separate Forms 1099-R.  I’m also having difficulty reconciling the fact that two checks were issued with the fact that only one type of destination account was permitted to be selected that was to apply to both.
Are these two Forms 1099-R reported on a single sheet or are the two printed on separate forms?
Do these Forms 1099-R show the same account number in the Account number box?
Were these distributions made simultaneously?
And to repeat Alan’s question, did the payee on each of the checks specify the type of IRA to which the check was to be deposited?

Submitted by Mahmood Malik on Tue, 2021-03-16 16:13

These Forms 1099-R make it appear as though there were two independent distributions, not a single distribution split to two destination accounts, each requested to be a direct rollover to a traditional IRA despite one of the checks being deposited into a Roth IRA 
#1. When I recived checks all I was told a) their will be two checks ($176K  & $9K) b) $9K amount is from after tax contribution without any interest C) have to deposit to one target IRA account.#2. Based on the information  that $9k is after tax, I deposted $9K check to Roth and other $176K check to traditional IRA.#3. 1099-Rs came much after I had deposited the checks. These 1099s made me think is it legit wat i have done and how to report that in my taxes.  However, the fact that the box 5 amount each Form 1099 is exactly the same proportion of the box 1 amount, it seems clear that these distributions came from the same account, so it doesn’t seem to make sense that there are two separate Forms 1099-R.  I’m also having difficulty reconciling the fact that two checks were issued with the fact that only one type of destination account was permitted to be selected that was to apply to both.
Are these two Forms 1099-R reported on a single sheet or are the two printed on separate forms? 2 separate 1099-Rs. See at bottom 1099-R information from the both of them.
Do these Forms 1099-R show the same account number in the Account number box? different account#s
Were these distributions made simultaneously? yes. Lumpsum distribution
And to repeat Alan’s question, did the payee on each of the checks specify the type of IRA to which the check was to be deposited? #1. NO. check was written to Trustee name FBO my name #2. We were asked where we would depsoit checks to and i had indicated Traditional IRA.  
 1099-R information is as below
  Col#1              Col#2a     #2b tx amt Not det,   Tot. dist.     Col#5       Col#7       Account# column                       176,633.74      $0.00     UNCHECKED                 CHECKED    8,730.22      G           nxyz Z-0002-GRP                                       9,184.15      $0.00    UNCHECKED                 CHECKED        453.93      G           nxyz Z-0003-GRP        

Submitted by David Mertz on Tue, 2021-03-16 16:25

The fact that these Forms 1099-R show different account numbers might explain why there are two Forms 1099-R, although the difference in account numbers seems to just be identifying sub-accounts.  It seems reasonable to treat each form as having rolled the after-tax portion directly to the Roth IRA and the pre-tax portion directly to the traditional IRA.  The fact that one check included the after-tax portion from both distributions and the other check included the pre-tax portion of both distributions seems like it was just done as a convenience to avoid issuing four checks instead of two.
Depending on the tax return software being used to prepare the tax return, it might have to be entered as two Forms 1099-R, one with $0 in box 5 of the $176,633.74 distribution and the other with the combined $9,184.15 of box 5 amounts in box 5 of the $9,184.15 distribution.

Submitted by Alan - IRA critic on Tue, 2021-03-16 16:51

It appears that the plan provisions for this plan have not been updated for 20 years. One direct rollover is the minimum required and acceptance of Notice 2014-54 is voluntary, therefore the plan does not appear to be in violation of their antiquated provisions. To have rolled your after tax total to a Roth IRA, you would have had to select a cash out which would have triggered 20% withholding on the taxable portion (about 35k). You would have had to come up that amount to complete two 60 day rollovers with the after tax going to your Roth IRA. You would then have received credit for the withholding with your 2020 return. Most people do not have 35k  available to pursue this strategy.
Finally, the plan used a separate account # to track after tax contributions (possibly recharacterized excess contributions due to HCE testing failure). If the plan ever did allow separate distributions while still in service, some plans terminate that option upon separation, so the separate account # only remains as an accounting artifact. All this has resulted in the 1099R forms treating this as one commingled balance of pre tax and after tax even though separate checks were issued. 
Am sure many separating employees have fallen victim to this plan’s archaic provisions.
Had not seen DMx latest post when this was posted. He came up with an aggressive approach to the entire problem that would also eliminate the TIRA basis issue. Probably worth a try. The IRS mostly attempts to make sure any Box 2a amounts are reported, so this might work.

Submitted by Mahmood Malik on Tue, 2021-03-16 18:22

IT APPEARS THAT THE PLANPermalink Submitted by Alan-iracritic@… on Tue, 2021-03-16 12:51
It appears that the plan provisions for this plan have not been updated for 20 years. One direct rollover is the minimum required and acceptance of Notice 2014-54 is voluntary, therefore the plan does not appear to be in violation of their antiquated provisions. To have rolled your after tax total to a Roth IRA, you would have had to select a cash out which would have triggered 20% withholding on the taxable portion (about 35k). You would have had to come up that amount to complete two 60 day rollovers with the after tax going to your Roth IRA. You would then have received credit for the withholding with your 2020 return. Most people do not have 35k  available to pursue this strategy.
Finally, the plan used a separate account # to track after tax contributions (possibly recharacterized excess contributions due to HCE testing failure). If the plan ever did allow separate distributions while still in service, some plans terminate that option upon separation, so the separate account # only remains as an accounting artifact. All this has resulted in the 1099R forms treating this as one commingled balance of pre tax and after tax even though separate checks were issued. 
Am sure many separating employees have fallen victim to this plan’s archaic provisions.
Had not seen DMx latest post when this was posted. He came up with an aggressive approach to the entire problem that would also eliminate the TIRA basis issue.  Probably worth a try. The IRS mostly attempts to make sure any Box 2a amounts are reported, so this might work.
What is risk with this?
I would like to be prepared for the risk?
Form my naieve (am just a consumer of IRAs) perspective, Form 5498s would match with  sum of both 1099s…. so it should work.
Thanks for all the help.

Submitted by David Mertz on Tue, 2021-03-16 18:28

I’m not sure that the approach I suggested is particularly aggressive since it just treats each Form 1099-R as reporting a separate split rollover and showing the correct taxable amount of $0.   How it needs to be entered into tax return software is largely irrelevant as long as the correct taxable amount of $0 appears on 2020 Form 1040 line 5b and, if the software does Roth basis tracking, the part rolled over to the Roth IRA is tracked as nontaxable conversion basis.  With no tax withholding, the only reporting that the IRS will see are the amounts on Form 1040 lines 5a and 5b, a rollover notation, and rollover contributions on Forms 5498 from the traditional and Roth IRAs.  The fact that the two after-tax portions were combined onto a single check and the two pre-tax portions were combined onto a separate single check seems to me largely irrelevant to how it is reported and is not anything the IRS would see without an audit, although that combining might require a bit of explanation in the unlikely event that the IRS does have any questions about these transactions.  This seems far less aggressive than the common situation where the payer reports a non-taxable rollover of pre-tax money to a traditional IRA but the employee diverts the rollover a Roth IRA, causing the rollover to be taxable despite being reported as nontaxable on the Form 1099-R.

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