1099-R tax question and in-service withdrawal

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

1099-R tax question and in-service withdrawal

Post by SpecialK22 »

I'm just wondering if this is right:

I took an in-service distribution of after-tax contributions plus gains and rolled them to a Roth IRA at Vanguard. I had received two checks: one was for the contributions and the other for the gains. Both of these were sent to Vanguard immediately upon receipt and deposited into my Roth IRA. I received a 1099-R for both the withdrawal of the after-tax portions and the gains. Under distribution code, it states "1" for the portion that was after-tax contributions; it states "G" for the portion which was for the gains. Just googling distribution codes, it states that a distribution code of "1" is for early distribution, no known exception and "G" is direct rollover. Taxes were not withheld for either distrbution and both 1099-Rs state that the taxable amount is 0.00. Will this cause me any issues (like a 10% penalty), or will everything be cleared up correctly when it is revealed these funds were all rolled into a Roth IRA? My understanding is I should receive no penalty for early distribution and will only owe taxes on the portions that were gains.
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Post by MarkNYC »

Were the 2 checks that you received made payable to you or to Vanguard?
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

The check that was for the after-tax contributions was made payable to me; I endorsed it to Vanguard.

The check for the gains was made payable to Vanguard FBO me.

Thanks for the help.
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: 1099-R tax question and in-service withdrawal

Post by tfb »

SpecialK22 wrote:Taxes were not withheld for either distrbution and both 1099-Rs state that the taxable amount is 0.00. Will this cause me any issues (like a 10% penalty), or will everything be cleared up correctly when it is revealed these funds were all rolled into a Roth IRA? My understanding is I should receive no penalty for early distribution and will only owe taxes on the portions that were gains.
10% penalty is only on taxable amount. 10% of zero is still zero.
Harry Sit has left the forums.
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

I would think I would owe taxes on the after-tax gains, which would be a small amount. Mostly what has me worried is that the after-tax portion states the withdrawal was an early withdrawal, no known exception. Does the fact that this money was put into a Roth IRA potentially affect anything? Vanguard considered both portions--after-tax and the associated gains--to be rollovers that did not affect my normal contribution amounts to a Roth IRA. I'm probably worrying about nothing and this is normal, but it just struck me as kind of odd.
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Post by MarkNYC »

SpecialK22 wrote:The check that was for the after-tax contributions was made payable to me; I endorsed it to Vanguard.

The check for the gains was made payable to Vanguard FBO me.

Thanks for the help.
Not sure if you'll have any problems, but you might. Since the check for the "gains" portion was made out to Vanguard, the distribution should qualify as a "direct rollover" as explained by the Code G. But the rollover/conversion to a Roth account of pre-tax funds is taxable, so the taxable amount in Box 2 of 1099-R should not be zero, it should be the full amount distributed. I think a Code 2 on the 1099-R would have been more appropriate, indicating taxable but no penalty due to a known exception.

The check made out to you for the after tax money is properly shown as zero taxable on the 1099-R. Code 1 is correct but no penalty would apply since the distribution is non-taxable. But you're rolling over the plan distribution to a Roth IRA might be a problem. I could be mistaken, but I believe that the non-taxable portion of a distribution from a qualifed plan can only be rolled over to an IRA or other qualified plan by means of a "direct rollover". It's possible the check being made out to you would fail to satisfy the direct rollover provision.

Was there a reason one check was payable to Vanguard and one payable to you?
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

I'm not sure why they did two checks, as I mentioned to them my plan was to roll all the money to a Roth IRA. Vanguard did seemingly accept all the money as a rollover--both the portion that was after-tax and the gains. The only thing Vanguard seemed to care about was that I endorsed the check made out to me over to them. They didn't seem concerned that one check was made out to them and the other to me, so hoepfully that is a good sign and not also an oversight on their part.
cliffedelgado
Posts: 105
Joined: Fri Apr 16, 2010 1:52 am

Post by cliffedelgado »

Is this 1099R from vanguard or the other institution ? I thought if there's any problem in this, it would be from the sending institution.
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

These 1099-Rs are from the 401(k) administrator.
cliffedelgado
Posts: 105
Joined: Fri Apr 16, 2010 1:52 am

Post by cliffedelgado »

Since the after-tax check was made out to you, I'm guessing they could not put a G as it was not truly a direct rollover. The taxable amount is 0, and box 5 is the entire after-tax amount right?

Gains part should be ok even though Box 2a (taxable amount) is 0. Since it was directly rolled over, it should be 0. http://www.irs.gov/pub/irs-pdf/i1099r_10.pdf Box 5 would would then show how much basis you have, which should also be zero.

I'm not sure about MarkNYC's issue that you must do a direct rollover in this case.

I did a direct rollover for both after-tax + gains (using 1 check FBO), and was issued 1 1099R with code G.
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

cliffedelgado wrote:Since the after-tax check was made out to you, I'm guessing they could not put a G as it was not truly a direct rollover. The taxable amount is 0, and box 5 is the entire after-tax amount right?
Yes, that is what my 1099-R for shows for the after-tax contributions.


I'm hoping this isn't going to cause me issues, and that since Vanguard accepted both checks as rollovers it'll turn out all right.
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

I just thought of something else: Would the check made to me be eligible for rollover, since it was rolled over within 60 days of the check being cut?
scrabbler1
Posts: 2797
Joined: Fri Nov 20, 2009 1:39 pm

Post by scrabbler1 »

Not sure how similar to your situation mine was back in 2008, but here is what happened to me.

I had several types of money in my 401(k) when I left the company just over 2 years ago. I had after-tax contributions, pre-tax contributions, earnings on each type, and company stock. [I will omit the company stock part from the rest of the story because it is not relevant to you.]

I wanted to do a direct rollover of all the tax-advantaged money into a TIRA but cash out the after-tax contributions (not earnings). I was not going to create any Roth IRA.

I had a rollover check to Fidelity of all the tax-advantaged funds (pre-tax contributions, earnings on both the pre-tax and after-tax contributions) with the following data on its 1099-R form: Box 1 had the Gross distribution, Box 2a had $0.00 as the Taxable amount, and Box 7 had "G" as the Distribution Code. I turned that check over to Fidelity a week later when I opened the IRA.

In an electronic payment to me, I had a 1099-R form with the following data: Box 1 had the Gross distribution, Box 2 had $0.00 as the Taxable amount, Box 5 had the Employee contribution (same as Box 1), and Box 7 had "1" as the Distribution Code (although that appeared to apply only to the stock distribution which shared the 1099-R form). All I was doing was retrieving money which had already been fully taxed while I had a chance to do it.
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

Thanks for the reply, scrabbler. My situation as far as how the checks were cut sounds similar to yours; however, I was attempting to roll the full amount to a Roth IRA. I'm probably going to need to get some professional guidance, but what I'm hoping is the case is that I had 60 days to roll the check cut to me to my Roth IRA.
FoolishJumper
Posts: 351
Joined: Wed Aug 05, 2009 3:48 am
Location: Midwest

Post by FoolishJumper »

SpecialK22 wrote:Thanks for the reply, scrabbler. My situation as far as how the checks were cut sounds similar to yours; however, I was attempting to roll the full amount to a Roth IRA. I'm probably going to need to get some professional guidance, but what I'm hoping is the case is that I had 60 days to roll the check cut to me to my Roth IRA.
No problem at all. Vanguard has done everything correct, although I agree with a previous poster that you should have gotten Code 2 instead of Code 1, but that had to do with getting the check from your 401k made out in your name instead of 'Vanguard FBO (for benefit of) SpecialK22'; you may want to request that in the future instead of a check in your own name. Since it was made out to your name, they can't guarantee it was a Roth rollover, so they had to use Code 1.

Anyway, your confusion will be remedied in May when Vanguard sends out your Form 5498. This form is not required for filing your 2010 taxes, so no need to get alarmed in the arrival date (although I'll still bring up that Fidelity has no problem providing the 5498 in January and giving an update in May if required). This form is your 2010 IRA contribution statement and will be provided to the IRS. Box 2 on this form is 'Rollover Contributions' and that value will match directly with your 1099-R(s). When you file your taxes, you will put your taxable portion of the 1099-R (with Code 2) as 0, since that was all after-tax contributions. The 1099-R for gains (with Code G) will be 100% taxable, as all gains from an after-tax 401k are taxable. As long as the IRS gets this Form 5498, then they will not be alarmed that you aren't paying tax & penalty for the "early distribution" from your 401k.
Topic Author
SpecialK22
Posts: 844
Joined: Tue Sep 01, 2009 3:16 pm

Post by SpecialK22 »

Thanks for that information; it was very helpful. So, when I file my 2010 taxes this won't cause any issues (10% penalty, taxes) even if I don't have the 5498 yet?
jeh676
Posts: 188
Joined: Thu Oct 07, 2010 1:59 pm

Post by jeh676 »

http://www.irs.gov/pub/irs-pdf/f8606.pdf

Is Part 3 of this form applicable here? If it is, it seems to handle it the way you expect....Contributions roll over without tax issues, but gains will be taxed but no penalty.
cliffedelgado
Posts: 105
Joined: Fri Apr 16, 2010 1:52 am

Post by cliffedelgado »

Has anyone tried doing their taxes with the 1099R from after-tax 401k to Roth IRA using Turbotax?

As described above, my 1099-R seems correct to me.

However, when I put in the numbers, my total income is jumping by the COMBINED value of box 1 (gross distribution) and box 5 (employee contributions/desg Roth contrib). This value is going on line 16b of form 1040. As you can imagine, this is resulting in a lot of taxes due...

edit: I updated my turbotax, and it half corrected itself. Now only box 1 is going into line 16b. However, this should be reduced by box 5 of 1099-R. So seemingly went from (box1 + box5) to (box1). I need it to become (box1 - box5).

edit2 3/3: Looks like I was hitting this: http://turbotax.intuit.com/support/iq/R ... 46682.html I will try again to see if they have totally fixed it
Post Reply