1099-R

[Hippo24]

I was 41 years old last year. Last year, I asked my financial organization to roll over $8000 in my pre-tax 403(b) to ROTH IRA in the same organization. The organization rolled over $6400 and withheld $1600 for federal tax. Consequently, I received two 1099-R forms. The 1099-R form for the $1600 withheld federal tax has a distribution code "2" for Box 7. My understanding is that the $1600 is subject to the 10% penalty so the distribution code should be "1". I contacted the financial organization and they refused to correct the form. My questions are:

1). Is my understanding that the $1600 tax withheld is subject to the 10% penalty correct? 

2). If my understanding is correct and the financial organization refused to correct the 1099-R form, how to correctly file the my tax using the TurboTax? Should I just put distribution code "1" when I put in the information in TurboTax?

[KrisD15]

To clarify, had the employer contributed to the 403(b) and is the box for IRS/SEP/SIMPLE checked on the 1099-R?

[Hippo24]

Both employer and me (employee) contributed to the 403(b) when I was an employee there. The "IRA/SEP/SIMPLE" box is not checked. 

[DaveF1006]

 Yes, this was not handled correctly. You should have received a 1099R reporting $8000 as the amount in Box 1. Federal income Tax in box 4 and a distribution code "G" in Box 7.

As it stands now, only $6400 has been rolled into your Roth account. A second 1099R is issued that is subject to a early withdrawal penalty.  In addition, it may have been reported as taxable income on your return. You do need a 1099R to correct this mistake because this makes a huge difference in your return.

[Edited 03/26/24|4:15 pm PST]

@Hippo24 

[dmertz]

This was handled oddly and is oddly reported on the Forms 1099-R.

First, if your intent was to roll over $8,000 from the traditional account in the 403(b) to the Roth IRA, the entire $8,000 should have been deposited into the Roth IRA as a direct rollover for which there would have been no requirement to withhold taxes.  You then would have paid the increase in your tax liability using other funds.

It appears that they instead did an indirect rollover which requires a minimum of 20%, $1,600 in this case, be withheld for taxes.  Why they would do an indirect rollover in-house is a mystery since it makes no sense to do that.  However, given that they did an indirect rollover, only $6,400 was rolled over to the Roth IRA and $1,600 was an ordinary early distribution.  It seems that they used code 2 for this rollover of the $6,400 because they knew that it went to the Roth IRA.  They probably should have reported it as a direct rollover using code G, but the result with code 2 is the same as long as you tell TurboTax that the $6,400 was rolled over ("converted") to a Roth IRA.

The $1,600 reported on the code-1 Form 1099-R represents an amount distributed to you and not rolled over to the Roth IRA, so it is subject to an early-distribution penalty unless within 60 days you used other funds to complete the rollover of the $1,600.

[Hippo24]

You are very correct that this was handled oddly. When I filled out the paperwork for the rollover, I chose not to withhold federal tax but they still withheld 20%. I contacted them after and they said they made a mistake. I could submit a formal complain and they could try to get the $1600 back from IRS but they said there was no guarantee as it is easy to "send money to IRS" but it is difficult to "get the money back". Then I was like fine and I did not want to go through the hassle to change it.  

They used the correct code "G" for the 1099-R for the $6400. However, they used code "2" for the 1099-R for the $1600. I think they should use code "1" for the $1600 but they said the "$1600" is not subject to the early withdraw penalty. Should I just put code "1" when I put the 1099-R information in TurboTax for the $1600 even it is code "2" on the form I have?

@dmertz 

[Hippo24]

But only $6400 was rolled over to my Roth IRA, and the $1600 was withheld for federal tax and was not rolled over to a retirement account eventually. Shouldn't the $1600 be considered as early distribution? 

@DaveF1006 

[DaveF1006]

Yes, the way this is reported, not only would you incur a early withdrawal penalty, but you could incur additional tax on the $1600 if this is reported as income on line 1 of the 1099R. I apologize I misread this in my earlier post. 

I may have a solution to your dilemma. Here is what I suggest doing.

1. For the second 1099R. Report it as it is recorded on your 1099R hard copy with the Code 2. if it is reported as taxable income and appears as taxable income in line 5B of your 1040, then exclude the 1099R. Verify this by looking on your 1040.
2. Verify with the pension administrator that the federal income tax was submitted to the IRS.  If so, we can report this as taxes paid so you will receive credit for the payment.

To exclude the income if it is reported as taxable income in your return.

1. Log into your account
2. Select Wages and income>other income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. Here you can describe this as "1099 R Mistakenly issued for payment of Federal Taxes Withheld for a Roth conversion.  if you have enough room, you may add that the taxes withheld should have been listed in Box 4 in the original 1099R that reported the rollover. You may truncate this some so that the verbiage can be reduced.
7. For the amount, put in -1600. This will keep this amount from being taxable.

Secondly, you want to receive credit for the $1600 in taxes you paid. The second 1099R did not achieve this purpose. My suggestion is to enter $1600 as taxes paid.

1. Go to the deductions and credits portion in your return.
2. Go to estimates
3. Go to Other Income Taxes
4. Other Income Taxes paid in 2023
5. Withholding not already on a W2 or 1099.

Of course, the best solution is to have a corrected 1099R to:

1. Reporting $8000 in line 1, and have it reported as taxable in line 2.
2. Report the income tax paid in Box 4
3. Report a code "G" in box 7

What this would have done is report this as a Roth Rollover but the $8000 is taxable because you converted some of your tax-deferred plan to a Roth account. You would not have been penalized for a early withdrawal penalty. All these extra steps I provided would not have been necessary if this had been reported correctly.

If the IRS ever questions you about this, save a copy of this email along with my recommended solution. Tell them about the circumstances regarding the reporting of your 1099R and the company refused to issue a corrected one. I stand by my recommendation to correct this.

Hope this helps!!

@Hippo24 

[Hippo24]

Thank you for all your input. I apologized as I probably did not explain the situation correctly:

Totally $8000 was removed from my pre-tax 403(b) plan. Among the $8000, $6400 was rolled over to a Roth IRA and $1600 was withheld for federal tax. I did not receive the $1600 and the financial organization said it was sent to IRS. 

I received two 1099-R forms, one for the $6400 and one for the $1600. The 1099-R for the $6400 has correct information ($6400 as the "Grosse distribution" and "G" as the distribution code").

The issue is the 1099-R for the $1600 tax withheld for the federal tax. The "Gross distribution" in this form is "$1600", the "federal tax withheld" on this form is "1600" (so it does show the credit of the tax I paid),  but the distribution code is "2" instead of "1". My understanding is that the $1600 should be considered as income because it was not rolled over to another pre-tax retirement plan. In addition, I should pay the 10% penalty for the $1600 because it was withdrawal from a pre-tax 403(b) plan.

I did contact the financial organization and they refused to correct the 1099-R for the $1600 as they insisted that the code "2" was correct".

That is the dilemma I have right now as I believe the code should be "1" (correct me if I am wrong). If I am correct, can I just put code "1" in when I put the information of the 1099-R form for the $1600 into TurboTax so I can pay the penalty as expected? 

@DaveF1006 

[DaveF1006]

Got it!! Report both 1099 R's in one entry rather than two separate entries. Report $8000 as the  Gross Distribution in Box 1 and as taxable in 2A. Report $1600 in Box 4 and make the distribution code G in Box 7. Do not put a code 2 in because this wasn't distributed from your Roth account but rather from your 403B plan prior to conversion. 

You should not be charged an early withdrawal penalty because this is a conversion that is acceptable. There will be questions after you make this one 1099R entry asking if this was converted into a Roth. You will address this in this part of the interview.

This instruction supersedes any of my previous instructions but this is the most correct way of reporting. Remember this is taxable because you are converting part of your tax-deferred plan into a Roth, which is a plan that is funded by after-tax dollars.

Get the notion out of your head that you owe an early-withdrawal penalty. You do not !!

@Hippo24  

[Hippo24]

Based on your most updated reporting method, how is combing those two 1099-R forms as you described different from reporting them separately. If I report them separately as what they are right now, I pay tax for the $8000 (one distribution of $6400 and one distribution of $1600) with no penalty, and the $1600 withheld tax will be credited too.  

So you are saying that the $1600 withheld federal tax is not subject to penalty?  If that is the case, isn't the 1099-R form for the  $1600 with distribution code "2" correct then?

Another piece of information that may be useful is that I did not add $1600 back to the Roth IRA with my own money within 60 days of the roll over.

Thank you very much again for your help.

@DaveF1006  

[DaveF1006]

Yes, if you decide to report the two1099R as separate entries and report the second 1099R with a code 2 in Box 7, this is correct. The $1600 should not be assessed an early withdrawal penalty because it should have been reported in one 1099 R form in the beginning.

@Hippo24 

[VolvoGirl]

@Hippo24   Go back up and read the posts from dmertz.  Yes there is the 10% Early Withdrawal Penalty on the 1,600 withholding.  It is considered an early distribution.   @dmertz 

[Hippo24]

Another piece of information that may be useful is that I did not add $1600 back to the Roth IRA with my own money within 60 days of the roll over. Do you think that makes a difference?

I had the impression that the $1600 withheld federal tax was subject to penalty after I read the example from IRS (https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...). 

"Example: Jordan, age 42, received a $10,000 eligible rollover distribution from her 401(k) plan. Her employer withheld $2,000 from her distribution.

1. If Jordan later decides to roll over the $8,000, but not the $2,000 withheld, she will report $2,000 as taxable income, $8,000 as a nontaxable rollover, and $2,000 as taxes paid. Jordan must also pay the 10% additional tax on early distributions on the $2,000 unless she qualifies for an exception.
2. If Jordan decides to roll over the full $10,000, she must contribute $2,000 from other sources. Jordan will report $10,000 as a nontaxable rollover and $2,000 as taxes paid.

If you roll over the full amount of any eligible rollover distribution you receive (the actual amount received plus the 20% that was withheld - $10,000 in the example above):

• Your entire distribution would be tax-free, and
• You would avoid the 10% additional tax on early distributions."

The scenario from the example is roll over from a pre-tax plan to traditional IRA plan so the tax portion is different but I thought the penalty portion was the same as my scenario. 

Thank you very much again. Really appreciate your help and input.

@DaveF1006