480.7C Puerto Rico Profit Sharing Plan Roll Over to US Mainland IRA

[esmurriame]

I worked and lived in Puerto Rico for 17+ years (US citizen).  During that time, I had the benefit of a Profit Sharing retirement plan from my employer.  The plan is qualified under section 401(1) of the Internal Revenue Code and is exempt from US taxation under section 1022 of ERISA (Employee Retirement Income Security Act).

I moved permanently to the US mainland in 2010 and have been working here since.   Last year (2022) I made a lump sum rollover of my PR Profit Sharing Plan funds into a new personal IRA in mainland US with UBS.   When executing the rollover, the PR plan trustee (Banco Popular) retained 20% for local Puerto Rico taxes since the funds were moved out of the island.

I received form 480.7C issued by Banco Popular which documents the rollover distribution and 20% local taxation.  I inquired the bank and asked if a 1099R was going to be issued and I was told that it wasnt because this fund was not US Taxable Income (only PR since it was earned while I worked and lived there).

I checked on the IRS website and using their system I was told that while this is a US Tax Free transaction, it is a reportable event. 

My questions are:

1) how do I enter this on TurboTax given there will really never be a 1099R issued?

2) can I somehow inform (via TurboTax) that there was PR Tax witholding associated with this transaction?

thanks in advance.

[ThomasM125]

You report the rollover by entering a substitute Form 1099-R in TurboTax as follows:

1. Choose the Federal option on your left menu bar
2. Choose Wages & Income
3. Choose the Retirement Plans and Social Security menu option 
4. Choose IRA, 401(k), Pension Plan Withdrawals(1099-R)
5. Choose the enter 1099-R option
6. Choose Change how I enter my form
7. Choose Type it in myself
8. Choose Financial institution or other provider (1099-R)
9. Enter in as much information as you can regarding the pension income 
10. Work through that section until you see Do any of these situations apply to you?
11. Choose I need to file a substitute 1099-R
12. Complete the information requested

You will use code G and indicate with the questions that will be asked that you rolled the money to a traditional, not a ROTH IRA account.

You can apply for a foreign tax credt for income taxes paid to Puerto Rico. 

To apply for a foreign tax credit:

1. Click on Deductions & Credits on your left menu bar
2. Choose Estimates and Other Taxes Paid
3. Choose Foreign Tax Credit and answer the questions in that section

[esmurriame]

@ThomasM125 

Thanks for your perspective.  I was able to enter the content of the 480.7C succesfully.  I am planning to file via mail so I can physically attach the form itself and hopefully that will provide the IRS with full context.

As far as the Tax Withheld I may need further guidance as it is an uncommon situation.  The income that was rollover is Exempt from Federal Taxation because it was earned while I was a bona-fide resident of Puerto Rico and I was locally employeed.  The key now is that in principle, as PR withheld the local taxes on the rollover, the amount in the personal IRA has already been taxed.  I  need to figure out how to ensure there is no additional taxation in future distributions since the amount was already taxed by PR and is not taxable by the IRS.

[ThomasM125]

The only way to have the distributions from the pension plan exempt from US taxation woud be to have the funds rolled over treated as non-deductible traditional IRA contributions or have the funds deposited into a ROTH IRA. If you chose the ROTH IRA, the roller over would be considered a ROTH IRA conversion and the amount rolled over would be taxable. However, you would get a credit for the taxes paid in Puerto Rico so they would offset to some extent. The problem with this is that you would only be able to deduct the foreign taxes to the extent of your US tax on foreign income, so the deduction may be limited. It is possible you could treat the contributions as not-deductible, since you never deducted them on your US tax return. You would need to ask your broker about that.