Alan S. wrote:It is going to take me some time to piece together all the ramifications of this apparent error on the part of the TSP.
Under the Pension Protection Act of 2006, direct rollovers from a qualified plan to a Roth IRA were authorized effective 1/1/2008 and Notice 2008-30 confirmed that a non spouse beneficiary could also transfer their death benefit to an inherited TIRA or inherited Roth IRA. Initially these transfers were optional. However, in Dec 2008 Bush signed the WRERA tax legislation that made these transfers mandatory effective 1/1/2010, just like any other required direct rollover. Whether they think this transfer is mandatory or not, that is what they have done. While the TSP is formed under a different tax code section than 401k plans, they basically operate identically as far as I can tell.
The TSP did not adopt Roth options until last year, and while this does not directly affect this apparent error, the fact that employees are now making Roth elective deferrals, means that the non spouse beneficiaries of those employees have only one type of IRA they can roll to, ie. an inherited Roth IRA. The TSP literature I just pulled up on their site does not recognize the possibility of transfer to an inherited Roth by a non spouse beneficiary. This means that they are either in violation of WRERA or are somehow exempt. That said, their literature is very clear that once death benefits have been distributed, they cannot be returned (not that you would want to). The TSP remains considerably behind private plans when it comes to Roth related transactions from direct contributions to beneficiary options. It is rather surprising given their size and overall efficiency that they lag behind in implementing retirement plan portability expansions passed by Congress a couple blocks down the street.
The 1099R they issue should include the taxable amount in Box 2a, and 4 and G in Box 7. 2a should equal Box 1 unless there are after tax contributions in the TSP. There should be a potentially matching Form 5498 reporting receipt of a rollover contribution to the inherited Roth IRA and that should raise red flags at the IRS. The distribution codes on your 1099R would not trigger the taxes, it would be an amount in Box 2a.
Questions: Was the TSP aware from the transfer paperwork that the funds were being transferred to an inherited Roth, or did they totally overlook your "red ink" notation? At this point I can't come up with a better suggestion than to contact TSP and demand to talk to a supervisor in the tax reporting unit and request a corrected 1099R. If you don't get anywhere, you could enter the taxable amount yourself in the TTax program for Box 2a.
Note: Your RMDs from the inherited Roth will be tax free unless you take out more than the amount you rolled over before the 5 years has elapsed that will make any earnings tax free.
tarnation wrote:The TSP is often behind other plans due to legislative lag (for whatever reasons), e.g. the TSP did not get authorization for a Roth option until 2009. Whereas the law provided for other plans well before that 2001? and even made them permanent in 2006?.
Alan S. wrote:The reply on Ed's website was not from Ed, but it's understandable since the TSP generally follows all the IRS rules for private qualified plans. The literature on the TSP site is somewhat confusing and it not designed to be understood easily by a non spouse beneficiary who might reasonably expect the TSP to follow the same guidelines as other qualified plans. And they do for the most part, but apparently have decided for whatever reason not to offer direct rollovers to non spouse inherited Roths. This is probably due to the fact that they just have not got around to it and/or changing their literature.Therefore, you are correct that a "beneficiary account" holder must be a spouse as their literature not so clearly indicates. This is an omission at the TSP, as they spent most of the last 18 months trying to roll out their designated Roth option without considering beneficiaries. I wonder if an employee passes after contributing to the Roth with a non spouse beneficiary, where the TSP thinks this funds should go since a Roth cannot be rolled into a TIRA!! I suppose they could just require the beneficiary to distribute the balance......
So now the funds are in your inherited Roth and the 1099R contains no taxable amount in 2a. If this inherited Roth means alot to you, you could be aggressive and report the taxable amount as if it was in 2a, even if the TSP refuses to correct the 1099R. But if you can get to the tax unit at the TSP or at least to a senior staffer there, you could try to get them to amend the 1099R. You have some leverage since they ignored your request on the form you submitted and did not contact you, but you did not indicate the actual mechanics of the transfer. Did they mail you a check, and if so how did the payee read? If they are willling to acknowledge some fault according to their procedures, their solution will probably be to request a transfer back to the plan and then they will re transfer the funds to an inherited TIRA to agree with their 1099R. You may not want that outcome, but I still think you need to contact someone there that understands the entire picture including the fact that this is commonplace with the private sector qualified plans.
In the meantime, since a non spouse beneficiary cannot roll over an inherited IRA account, do NOT take a distribution from the inherited Roth other than your RMD because you cannot roll it over and even if though you intended to pay taxes on it anyway, you would lose the potential of additional tax free gains in the Roth.
Let us know what the TSP says, unless you plan to just report the income and leave the TSP out of it. I doubt the IRS will care, since their own Regs allow this transfer and they are getting their taxes on the full amount. I would be surprised if you ever heard from the IRS if you just added the taxable amount that would have been in 2a into your tax program.
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