Old Annuity IRA: contains both pre-tax & post-tax 401k monies

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Topic Author
carlight
Posts: 4
Joined: Sun Apr 14, 2019 4:59 pm

Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by carlight » Sun Apr 14, 2019 5:31 pm

Long time lurker(10 years plus): first post ever!

Long time ago (1995 -2004) contributed both 401k pretax and 401k after tax. Never heard of a Roth at that time! Left employer and rolled all monies into IRA annuity 2005. I would not have done that today. However now I have this 'mess'. Now that I am over the 59 1/2 years old threshold, and have ER, took the 10 year payout option to bridge until SS at 70. paid 1x per year. But I cannot figure out what part is taxable each year?
Rough numbers at rollover:
165k pre tax and earnings
40k post tax contributions
Will receive:
47k x 10 years
However how much of the 'initial basis' do I claim each year? Apparently rules changed over time.
Some say 100% basis first year, other sources say 100% last year, other sources state 10% each year. I have contacted the Annuity company that tells me to contact my tax advisor. I have talked to multiple accountants. And there is no consensus - yes i know today, the after tax portion would be rolled into a Roth IRA. But what to do with an account that is very old and not broken out then.

Is there a clear resolution to this? Do i need to meet with the IRS in person to show them my paperwork showing I already paid taxes on 40k? And likely update the 8606 for each year since?

I have lurked here for 10+ years and gained so much for all the knowledgeable people here. You are the reason I am ER today - I searched throughout this forum: I cannot be the only one to fall into this 'hole'. Any and all suggestions would be appreciated.

carlight

ralph124cf
Posts: 2214
Joined: Tue Apr 01, 2014 11:41 am

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by ralph124cf » Sun Apr 14, 2019 6:17 pm

Most likely, this is a question for a tax CPA.

It is possible that the payor of the annuity has those figures and will provide them on the 1099 that you get.

TIAA does that for DW.

The basic idea is that you don't need to pay tax twice on the same money. Documenting that you have paid tax on some of the money coming out will be the problem. Only the money coming out that you put in after tax will be tax free, any earnings on that money is fully taxable.

Ralph

Topic Author
carlight
Posts: 4
Joined: Sun Apr 14, 2019 4:59 pm

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by carlight » Sun Apr 14, 2019 7:03 pm

Thank you for weighing in!
The annuity provider took the easy way out and left the Taxable amount field blank and checked the Taxable amount not determined box.
I have talked to 5 tax CPAs and there was not a consensus! One said deduct 100% of 'basis after tax contributions' (not earnings) the first year, one said 100% is deducted the last year, one said it is allocated across the duration ie. 10% per year. Two said to go back to the Annuity company. And again the Annuity said that they don't give tax advice. And since it was a rollover from a company plan they do not track that basis.

Any suggestion as to what tax CPA you might recommend?

Thanks again for your input!

carlight

Alan S.
Posts: 8351
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by Alan S. » Sun Apr 14, 2019 7:43 pm

carlight wrote:
Sun Apr 14, 2019 5:31 pm
Long time lurker(10 years plus): first post ever!

Long time ago (1995 -2004) contributed both 401k pretax and 401k after tax. Never heard of a Roth at that time! Left employer and rolled all monies into IRA annuity 2005. I would not have done that today. However now I have this 'mess'. Now that I am over the 59 1/2 years old threshold, and have ER, took the 10 year payout option to bridge until SS at 70. paid 1x per year. But I cannot figure out what part is taxable each year?
Rough numbers at rollover:
165k pre tax and earnings
40k post tax contributions
Will receive:
47k x 10 years
However how much of the 'initial basis' do I claim each year? Apparently rules changed over time.
Some say 100% basis first year, other sources say 100% last year, other sources state 10% each year. I have contacted the Annuity company that tells me to contact my tax advisor. I have talked to multiple accountants. And there is no consensus - yes i know today, the after tax portion would be rolled into a Roth IRA. But what to do with an account that is very old and not broken out then.

Is there a clear resolution to this? Do i need to meet with the IRS in person to show them my paperwork showing I already paid taxes on 40k? And likely update the 8606 for each year since?

I have lurked here for 10+ years and gained so much for all the knowledgeable people here. You are the reason I am ER today - I searched throughout this forum: I cannot be the only one to fall into this 'hole'. Any and all suggestions would be appreciated.

carlight
I'll assume that you purchased an immediate 10 year annuity here, so you no longer have an account balance for this IRA. If you do an this is just an installment distribution, please advise.

When an IRA account has been annuitized, it is difficult to believe but the IRS has never issued guidance on recovery of basis. Form 8606 is required to report your distributions, but line 6 asks for an account balance at the end of each year, but that figure it actually 0. The 8606 Inst. provide no guidance on how to complete line 6 in this situation. Therefore you will have to improvise and complete the form AS IF there was an account balance. You would then add the faux balance to the actual balance of any other IRAs you have.

To retrace what should have been reported to date, you should have kept some documentation such as a final plan statement showing your 40k after tax contributions. You should also have retained the Form 1099R reporting the direct rollover to an IRA. However, unlike non deductible TIRA contributions, the 8606 Inst indicate that you should not report this basis on Form 8606 until you OTHERWISE needed to file an 8606, Part I. If you took no distributions until the first year of the 10 year payout you would enter the 40k on line 2, (or add it to any prior 8606 line 14 showing any other IRA basis you have). Complete the rest of Part I. For the pivotal line 6 figure enter 90% of the value on the day you annuitized the IRA annuity. Each year's 8606 picks up the line 14 amount from the prior 8606, and line 6 will be 10% less than the prior year line 6. By the 10th and final year, line 6 would be 0 plus any other non annuitized IRA accounts you had.

Of course, if this is your only IRA, you will have fully distributed it and your basis by the end of year 10. But if you have other non annuitized IRAs, then the annual amount of basis recovery will be proportionately less, and you will have basis remaining to apply to your RMDs of the other balance after the annuity is fully distributed.

Some people will other IRAs might be tempted to split their basis and apply only part to the annuity and the rest to the other IRAs in proportion to balance. But that creates a filing hassle because you would need two separate 8606 forms and you would have to file on paper and explain your rationale to the IRS every year. Therefore, I don't recommend this.

Finally, there is another issue here IF you wanted to roll any of these annual distributions over. You could probably do this (subject to the one rollover rule or arrange a direct transfer) until the year you reach 70.5, but there is a small possibility that the IRS could argue that these annual distributions are RMDs because they are not completed prior to 70.5. For the 70.5 year, the distribution would apply to your RMD and could not be rolled over but you are probably OK rolling over the first 9 years if you want to under the assumption that they are NOT RMDs.

Alan S.
Posts: 8351
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by Alan S. » Sun Apr 14, 2019 7:52 pm

carlight wrote:
Sun Apr 14, 2019 7:03 pm
Thank you for weighing in!
The annuity provider took the easy way out and left the Taxable amount field blank and checked the Taxable amount not determined box.
I have talked to 5 tax CPAs and there was not a consensus! One said deduct 100% of 'basis after tax contributions' (not earnings) the first year, one said 100% is deducted the last year, one said it is allocated across the duration ie. 10% per year. Two said to go back to the Annuity company. And again the Annuity said that they don't give tax advice. And since it was a rollover from a company plan they do not track that basis.

Any suggestion as to what tax CPA you might recommend?

Thanks again for your input!

carlight
See my prior post. You will never get a consensus since there has been no specific IRS guidance for some unknown reason. Naturally, the life insurance IRA Custodian cannot know your basis and MUST check the "Taxable Amount not determined" box, although they also should be entering the full amount distributed in 2a. This tells the IRS that the taxpayer via Form 8606 needs to calculate the taxable amount. My suggestion on how to do that is above. Since the taxpayer is left to improvise, there are probably been a bunch of different approaches taken. I have not heard of any IRS issues with any of them, so they would probably accept anything logical.

I would not waste any more time and effort talking to tax people on this, since they have nothing to go by, and you will get suggestions ranging from the practical to the ridiculous. Whatever method you decide to adopt, you must be consistent from year to year. You might test your approach (including the approach I recommended) on a blank 8606.

This will be easier if this is your ONLY non Roth IRA account. If you have others, or expect to have others before the 10 years is up, please advise.

Topic Author
carlight
Posts: 4
Joined: Sun Apr 14, 2019 4:59 pm

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by carlight » Sun Apr 14, 2019 8:14 pm

Wow! Amazing detailed instructions and information! Unfortunately I have multiple IRA accounts - I have saved my whole life and previous employer 401k accounts have been rolled over - so multiple prorations will occur. But understanding how this would work if it was my only IRA helps tremendously. And knowing that this is a gray area for the IRS helps to confirm my suspicions.

Please accept my sincerest thanks!

carlight

Topic Author
carlight
Posts: 4
Joined: Sun Apr 14, 2019 4:59 pm

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by carlight » Sun Apr 14, 2019 8:38 pm

To clarify in case it makes a difference:
1.Annuity purchased in 2005 - could not remove funds for minimum 10 years or a substantial penalty.
2. Elected 10 year annuity payout - had choice of monthly, quarterly, or annual - so elected annual - basically 9 years + 1 day payout.
3. It was not an immediate SPIA when purchased - it was deferred - payments started when I requested in 2018 when eligible and older than 59.5

Thanks again-
carlight

Alan S.
Posts: 8351
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Old Annuity IRA: contains both pre-tax & post-tax 401k monies

Post by Alan S. » Sun Apr 14, 2019 11:46 pm

carlight wrote:
Sun Apr 14, 2019 8:38 pm
To clarify in case it makes a difference:
1.Annuity purchased in 2005 - could not remove funds for minimum 10 years or a substantial penalty.
2. Elected 10 year annuity payout - had choice of monthly, quarterly, or annual - so elected annual - basically 9 years + 1 day payout.
3. It was not an immediate SPIA when purchased - it was deferred - payments started when I requested in 2018 when eligible and older than 59.5

Thanks again-
carlight
The IRA annuity is treated just like any other IRA that has a balance until you annuitize, so this issue does not crop up until you annuitize it. Having several IRAs does not make this too much more complicated, since you would have to add the year end balances up anyway for all years in which you take a distribution. There is only one division performed with Form 8606 (line 10) to determine the non taxable amount of any distribution you take including the annuity payouts.

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