Incorrect Rollover Calculation?

[mbroncofan]

I have a 1099-R that has the following information:

Box 1:  $100,000

Box 2:  $30,000

Box 2b:  Total Distribution Only is checked

Box 5:  $36,000

Box 7:  G

IRA/SEP/SIMPLE is NOT checked.

Box 16 (State DIstribution): $30,000

All funds were rolled over.  $30,000 went to a Traditional IRA and $70,000 went to a Traditional Roth since that amount was not taxable.

When I enter this 1099 into TurboTax (deluxe) I plug in the numbers and answer NO to this money did not roll over to designated Roth 401K or 403B account.

I answered YES this money was rolled over to a Roth IRA account.  The next screen auto-populates to the $36,000 I entered into Box 5.

This generates a HUGE tax liability that I do not believe exists.  (Appx $19,000 Federal)  If I answer the second question NO, there is no tax consequence at all...which I believe to be correct.

Am I doing something wrong, or am I really up a creek with the way this was rolled over?

[DavidD66]

No, you're not doing anything wrong.  The program just doesn't like the distribution with two types of rollovers reported on the same 1099-R.  The distributions should have been reported separately, one using code G for the traditional IRA rollover, and with code H for the Designated Roth Contribution rollover to a Roth IRA.  But since that isn't the case, I would do exactly what you did - answer No to the question of was the money rolled over to a Roth IRA.  The result is correct - a tax free direct rollover of your 401(k).  

[dmertz]

Code H has nothing to do with this.  There was no distribution from a designated Roth account in the 401(k).

The amounts that you indicated for boxes 1, 2a and 5 of this Form 1099-R indicate that it is reporting that $30,000 + $36,000 = $66,000 went to the Roth IRA and the remaining $34,000 went to the traditional IRA.  If you somehow caused $70,000 to go to the Roth IRA and only $30,000 to go to the traditional IRA, the Form 1099-R either needs to be corrected by the payer or you need to submit substitute Forms 1099-R (Forms 4852).

[mbroncofan]

All good information, but dmertz, I'm not following your arithmetic.  And I'm sure it's because I'm not understanding the way the numbers are reported.  I see this as a $100,000 total distribution.  Of which, $30,000 is taxable and $70,000 has already had the taxes paid...so $70,000 goes to a traditional Roth. (our new financial advisor directed that.) The $30,000 goes to a traditional IRA.  I really don't see where the $36,000 even comes into play.  IRS Instructions state: 

 The entry in box 5 may include any of the following:
(a) designated Roth contributions or contributions actually
made on behalf of the employee over the years under the
plan that were required to be included in the income of the
employee when contributed (after-tax contributions), (b)
contributions made by the employer but considered to have
been contributed by the employee under section 72(f),

If I read that correctly, those contributions have been paid by us (after tax payroll deduction) or the employer (included on W-2's) and have been taxed...so therefore, are part of the $70,000 non-taxable portion of the rollover.  In fact, when the company sent the check to our new financial advisor (direct rollover) , they sent one check and paperwork designating exactly how much was what...like the 1099 states.

Looking at your numbers above, why would the $30,000 go to the Roth?  That is taxable and would generate a large tax bill.  So therefore, the $30,000 went to the traditional IRA.  Everything else went to the Roth because it was not taxable.  Again, I really don't see what the $36,000 has to do with this.  

Any help is greatly appreciated.

[dmertz]

Only the $36,000 shown in box 5, not $70,000, is after-tax money.

"why would the $30,000 go to the Roth?"

If it went to the traditional IRA, that money would have been nontaxable and not included in box 2a.  Because the $30,000 is being reported as taxable, it means that the payer is reporting is as having gone to the Roth IRA, effectively as a Roth conversion.  If the payer believed that $70,000 had gone to the Roth IRA, the taxable amount would properly have been reported as $34,000 (so that when added to the amount in box 5 the total would be $70,000).

If there was any rollover of designated Roth contributions, that would be required to be reported on a separate code-H Form 1099-R as DavidD66 indicated, but the fact that it was all reported on a code-
G Form 1099-R implies that none of this came from a designated Roth account and that the after-tax money was in the traditional account, something that is entirely plausible.  Of course the payer could have botched the reporting, but there is no way to know that from the Form 1099-R itself.

[mbroncofan]

I'm trying not to beat a dead horse here...but I have more information.  I went to the payer's website and pulled off the details of the rollover to my new advisor.  There were actually two checks written...both for the same account.

(1)  First check was written for $66,000 with $30,000 taxable and $36,000 non-taxable.  This is directly off the "details" sheet of the distribution details.

(2)  Second check was written for $33,000 and there is nothing mentioned regarding taxable or non taxable amounts.

There is no mention of distribution codes on either details sheet.

The details sheet indicates one account for both sheets...a 401K

This might be a mess...

[dmertz]

Given that these were from the same account, it seems that these must be distributions from the traditional account in the 401(k) , not from a designated Roth account.

The combination of the details of the Form 1099-R and the transaction details seem to agree that the check for $66,000 was to be deposited into the Roth IRA as a Roth conversion (technically a taxable rollover) and the check for $33,000 was to be deposited into the traditional IRA as an ordinary rollover.  From your original question It seems that this is where the checks were properly deposited.

To report these rollovers in TurboTax, you must split the Form 1099-R into two.  The first one will have $66,000 in box 1, $30,000 in box 2a, $36,000 in box 5 and code G in box 7 which you will indicate to TurboTax was not rolled over to a Roth 401(k) but was rolled over to an Roth IRA.  The second one will have $33,000 in box 1, $0 in box 2, $0 in box 5 and code G in box 7 which you will indicate to TurboTax was rolled over to neither a Roth 401(k) nor a Roth IRA.  The sum of the corresponding boxes on the split forms must be the same as the dollar amounts in the corresponding boxes on the form provided by the payer.  On Form 1040 TurboTax will include $99,000 on line 5a and $30,000 on line 5b with a "ROLLOVER" notation next to line 5b.

[mbroncofan]

I think you are really close!  I actually spoke with the payer online and my new FA both and this is what they both told me...they are in agreement.

Looking at the details because it gives the most information...the box 5 ($36,000) entry in the 1099 is the amount of contributions we personally made into the after tax 401K.  (It's technically not a roth, but kind of acts like one)  The gross distribution of details (1) of $66,000 minus the employee contribution of $36,000 comes up with the taxable amount of $30,000 in box 2a of the 1099.  I get all that.  The details (2) shows a distribution of $33,000 and since none of it shows a taxable amount on the details...and no amount of that is included in box 2a of the 1099, the payer told me the entire $33,000 is non taxable. 

Therefore, I believe (as does my new FA) that the $30,000 of taxable rollover into a traditional IRA...and the balance of $70,000 into a Traditional Roth IRA is correct.  The difference between that $70,000 and the $36,000 employee contribution is the amount paid by the employer and included on a W-2.  My next task then is to follow your instructions with splitting the 1099 to get the program to recognize it correctly. 

Do you agree?  And won't splitting the 1099 throw a flag to the IRS or won't they even know?

Thank you for all your help...it's been amazing!

[mbroncofan]

The only way I could make this work is two 1099's.

The first one was for the taxable amount of $30,000.  I put that same amount in box 2a, Total Distribution, Box 5 was 0, Code G and no Roth IRA or Roth 401K.  The second was for the balance of the $100,000 on the 1099...$70,000.  Nothing in box 2a, total distribution, and I changed Box 5 to $70,000.  No Roth 401K, and yes to Roth IRA.  That gave me the desired tax outcome.  However, the only entry on the 1040 is 5a...the taxable amount for this 1099 on 5b is 0.  There are no entries on 4a or 4b...which I believe to be correct because these funds did not come from a Roth.  I am guessing the code used in box 7 would determine that and code G doesn't do it.

Will these work?  My only other option to get the tax right is the first suggestion.  Just list the 1099 as printed and answer NO to the Roth 401K and Roth IRA questions.  I'm not so sure that might be the best way to go as what difference does it make and no changes to the 1099 (such as splitting) are necessary.

[dmertz]

"That gave me the desired tax outcome."

Unfortunately, that's the wrong out come.  The correct outcome is $30,000 on line 5b because $30,000 of the $66,000 rolled over to the Roth IRA is taxable income.  I described the split necessary to get the correct outcome.

(I'm not sure why your originally indicated that $70,000 was rolled over to the Roth IRA when the Form 1099-R and the check amounts indicate that only $66,000 was rolled over to the Roth IRA.  Perhaps you were just overly rounding the numbers.)

[mbroncofan]

I think I've confused you.  I've been known to do that to the best of them...

Your split did not work.  It gave me a tax liability...albeit a much smaller one.  I think it's because I've got you confused as to what I have.

First distribution check was for 66k.  30K was taxable.  That leaves 36K as non taxable.

Second distribution check was for 33k...all of which is non taxable.  33k + 36K is actually 69K...but the rounding of the numbers actually gets you to the 70K.  So 70K goes into a Roth IRA and the 30K goes to a traditional IRA.

As I mentioned, the only way to get the zero tax liability to show was as I mentioned:

The first one was for the taxable amount of $30,000.  I put that same amount in box 2a, Total Distribution, Box 5 was 0, Code G and no Roth IRA or Roth 401K.  The second was for the balance of the $100,000 on the 1099...$70,000.  Nothing in box 2a, total distribution, and I changed Box 5 to $70,000.  No Roth 401K, and yes to Roth IRA.  That gave me the desired tax outcome.  However, the only entry on the 1040 is 5a...the taxable amount for this 1099 on 5b is 0.  There are no entries on 4a or 4b...which I believe to be correct because these funds did not come from a Roth.  I am guessing the code used in box 7 would determine that and code G doesn't do it.

Again, this 1099 is for a 401K that both pretax and post tax contributions.  The payer could have been much clearer in my opinion, but this is what I have to work with.

Thank you again dmertz for all you are doing for me.

[dmertz]

You do have a tax liability resulting from these rollovers.  The rollover of the $66,000 is not tax-free.  Anything you do to try to eliminate the tax liability is erroneous.  The correct result is $30,000 on line 5b of Form 1099-R.

[mbroncofan]

Well, I sure hope you are incorrect.  According to the payer and my new Financial Advisor, you are indeed incorrect.  But just to be sure, I've scheduled an appointment with a tax attorney to get their opinion as well.

Thank you for all your time with this...it is greatly appreciated.

[dmertz]

It's not whether I'm right or wrong.  The Form 1099-R unequivocally indicates in box 2a that $30,000 of the rollovers is taxable.  If these rollovers are somehow nontaxable, it's the Form 1099-R that's incorrect.

[mbroncofan]

"The Form 1099-R unequivocally indicates in box 2a that $30,000 of the rollovers is taxable"  100% correct dmertz...and no argument.  That isn't the issue here.  I definitely put that in a traditional IRA.  The $36,000 is not an issue here.  It definitely went to a Traditional Roth.  The only issue here is the last $30,000.  It is not included in box 2 or box 5 of the 1099-R...and it should have been included in box 5.  After ANOTHER conference call with my FA and the payer, they have stated that on the rollover check stub that indeed the 30k is NOT taxable.  I have requested a copy of the check stub and will keep that in my records as proof to the IRS should it ever be required.  Therefore, in this particular case, DavidD66 has the best answer for this particular situation as NOTHING is going to make this "correct".  The payer should have done a better job of coding...but as long as I have documentation from the payer stating where every dime was directed to go, I'm comfortable with his solution.  The bottom line is there is absolutely no tax liability on anything placed into the Roth...so why the heck should I do anything that generates one???  

Thank you all for your outstanding help and guidance.