After Tax Contributions transferred to TIRA by formeremployer pension plan
A rollover was requested by a plan participant from the former employer Plan to a personal annuity IRA. Both banking institutions advised the participant to allow the financial institutions to handle it as a direct rollover with no transfer of funds through the employee. Subsequent years later, when the employee requested the IRA be transferred to a new employer’s plan it was discovered that after tax contributions had accidentally been included in the transferred due to errors on the part of both banking institutions, and without the participant’s knowledge. The suggestion was made that the participant take the after-tax portion as a distribution upon the second transfer (aged 60 years) to clear the error and avoid IRS penalties for the funds being incorrectly deposited. The subsequent 1099R was then issued to incorrectly indicate the amount as taxable. Is the banking institution required/able to issue a corrected 1099R in this case?
Permalink Submitted by Alan - IRA critic on Tue, 2021-03-16 17:23
Any chance the participant had other TIRA accounts when the rollover was made to the new employer plan? If so, the employer plan may not actually have received basis, since basis is not locked to any particular IRA account. If the new employer plan actually did receive IRA basis, this must be disclosed to that employer and the employer would then distribute the IRA basis back out of the plan with allocated earnings.
Not clear whether this basis you refer to as transferred was in the initial rollover, the rollover to the new employer plan, or both. Either way, an IRA custodian does not know or report IRA basis on a 1099R. It is up to the IRA owner to do that on Form 8606, then limit the amount of any rollover to an employer plan to make sure no basis is transferred there. The first step is to be sure that IRA basis was actually rolled into the new employer plan.
Are the tax years for these rollovers now closed years? Has an 8606 ever been filed showing IRA basis?
Permalink Submitted by Jennifer Koser on Wed, 2021-03-17 12:45
* There were no other accounts in any form other than the original employer-sponsored plan. All funds were in the original employer plan whose administrator, in error, included them in the IRA transfer without the participant’s knowledge. No funds were distributed to the participant at that time. The participant’s new employer plan administrator discovered the error approximately 8 years later, when attempting to roll the funds into the new employer plan, and determined they could not make the trnsfer until the error was resolved. Particpant investigated and prodived documentation to the IRA administrators of their error, and was subbsequently advised by the IRA administrators to “just pay the taxes again.” After two years of no futher cooperation from the IRA administrators and refusal of the new employer plan to accept the rollover, the IRA administrators now advised the participant could take a penalty-free distribution of the errant funds due to being aged 60, which they processed to the participant, and transferred ONLY the pre-tax portion to the new employer plan. The subsequent 1099R (for taxing year 2020) incorrectly shows the distribution as taxable, the bank’s explanation being “all funds from IRA’s are taxable because after tax contributions cannot be deposited into those accounts,” which begs the questiosn, then why did they do so?* No 8606 was filed.* The 1099R is for taxing year 2020.