deferred comp check from company for IRA
Have client who received a check from the State division of pensions and benefits. It was a after tax deferred comp he had. They gave him no choice to separate the cost basis and earnings. They sent one check for $151k made out to: investment company FBO his name, IRA.
Questions;
1. Can we return the check to the State and demand they separate the monies?
2, if not, can we send the check into the investment company under the IRA and then take out the cost basis and explain to the IRS next year at tax time?
3. Is there a way to separate the cost basis from the earnings inside of the IRA so he is not taxed on the cost basis again?
Any other suggestions would be of great help?
Thank you,
Doug
Permalink Submitted by Alan - IRA critic on Wed, 2022-01-05 20:31
Yes, I would return the check and request a Notice 2014-54 split rollover with the after tax portion going to a Roth IRA. If the plan cannot do this for some reason, then the next option would be a direct rollover of just the pre tax balance to a TIRA, and a check for the after tax amount sent to client, who can then do a 60 day rollover to the Roth IRA.
No, this will not work. Once the TIRA custodian deposits the check, client will have basis in the TIRA instead of having the after tax amount in the Roth to generate tax free gains. The IRA basis would be reported on line 2 of Form 8606, but client would then be subject to pro rating distributions for life, and any earnings would be pre tax.
As stated above, he would not be taxed twice, but the after tax amount would never generate tax free gains like it would if rolled to a Roth IRA. And the entire balance in the TIRA would be subject to annual RMDs. If the after tax amount is rolled to a Roth IRA, there would be no RMDs.
If client is still working and the entire amount went into his TIRA, if his new employer plan accepted pre tax rollovers from an IRA, the pre tax balance for his IRAs could be rolled into the new plan. That would leave only the after tax amount in the TIRA, which client could convert to the Roth tax free. If client is retired, then there would be no current plan to accept a pre tax rollover from the IRA. That leaves Q 1 as the only solution.
Permalink Submitted by Douglas Bauerband on Wed, 2022-01-05 21:16
He is only 42 yrs old and had to retire due to stage 4 pancreatic cancer. His after tax amount is $75k half of the 151k check.how can he rollover after tax money to a Roth IRA when you are only allowed $6000 per year as a contribution and the after tax money is 75K (non-qualifed money) and it was not an IRA or a qualified retirement plan?I know there is no limit to rollover from an IRA to a Roth IRA?Thank you,Doug
Permalink Submitted by Alan - IRA critic on Wed, 2022-01-05 22:20
If the check was made out to his name FBO IRA, the plan balance was obviously eligible for rollover unless the indication of the IRA as the receiving plan was all a clerical error. Perhaps the plan is a govt 457b, and such plans are eligible to be rolled over to an IRA or Roth IRA even though they are non qualified plans. Rollover contributions to an IRA have no dollar limit as long as the distributing plan is eligible for IRA rollovers..
Permalink Submitted by Douglas Bauerband on Mon, 2022-01-17 17:34
Even though it states on form to fill in a dollar amount for rollover and the balance to Him, they will only send one check and not two.question:1. if they send one check to him they will withhold 20% taxes, is it 20% taxes on the whole amount of 151k or only on the amount of the gain of 75K?2. When he gets the check (minus the 20%), can he still rollover the gain amount of 75k (by adding the 20% back to the gain out of the after tax money for 60 day rolllover) so he won’t be taxed or have a problem with the possible 10% early penalty?3. He can still do a rollover with the balance to a Roth IRA, correct?Thank youDouglas
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-18 00:24
Withholding only applies to the portion of the distribution which is taxable. It’s the portion that will appear in Box 2a of the 1099R. He will have enough money to complete the rollover of the taxable portion to the TIRA, which must be done first, but will have to come up with other cash to replace the amount withheld and complete the rest of the rollover to the Roth IRA. Net effect would be no current taxation or penalty.
What happened to the first check? Did the state accept the returned check?
Permalink Submitted by Douglas Bauerband on Tue, 2022-01-18 20:48
Yes, I voided the check sent back to them. This is the statement they sent to me which hurts the employee.The understanding based on my wording “one check” was misinterpreted. The one check is used to explain the contributions and gains would arrive as combined into one check. The NJDPB is unable to separate the SACT gains and contributions for any distribution check, rollover or payable to the member only. There would be no separation of gains and contributions. A member may receive more than one check based on their SACT type and distribution selection. However any check would have their contributions and gains – combined per checkQuestion: 1.does he have to rollover the full 74k, which makes up for the 20% taxes out?2. is there anyway to get back the 20% this year instead of having to wait until next tax return in 2023?Thank you.Doug
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-18 23:43
Client can roll over any portion they wish, and a partial rollover must be treated as applying to the taxable portion of the distribution. In addition, if the client wishes to split the distribution between a rollover to a traditional IRA and a Roth IRA, the rollover contribution to the TIRA must be done first. For example, if 75k is rolled to a TIRA, there will be no tax due on the 76k of after tax money. If the approx withholding of 15k cannot be replaced there will be 61k available for rollover to a Roth IRA (tax free) and the 15k sent to the IRS as withholding will also be non taxable.
Are you sure that the distribution was made in 2022? Withholding is always applied to the year of the distribution, so if a 2021 1099R is received by the end of this month, that means the withholding was applied to the 2021 tax account, and would be credited when the 2021 return is filed. Regardless of the year of withholding, it is not possible to recover it without a tax return. There is no other method to secure an IRS refund. Of course, the client could stop paying in estimates or withholding and doing that would essentially gradually reimburse client for the withholding taken out. However, if client cannot replace the withheld amount with other money to complete a 60 day rollover to the Roth IRA, the withheld amount would no longer be in a tax deferred account.