401k distribution and taxes

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jackal981
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Joined: Fri Jan 21, 2011 10:06 pm

401k distribution and taxes

Post by jackal981 »

My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k distribution and taxes

Post by retiredjg »

jackal981 wrote: Mon Apr 05, 2021 3:04 pm My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
Your wife's brokerage sent a check? Or did the check come from the old 401k?

Why would your wife's brokerage send an unrequested check? Something seems amiss.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: 401k distribution and taxes

Post by livesoft »

Years ago, my spouse received a check from an old ESOP when her employer was bought out in a bankruptcy. She ignored it until I asked about. Luckily she was able to deposit it into her IRA within the 60-day rollover period though it was close.

The OP's spouse could have something similar going on: Old 401(k) could require any small remaining amounts to be distributed. If she had done a previous indirect rollover in 2020, since only one is allowed, there could be a penalty, right? So the accountant could be right or could be wrong.

I suspect the cost basis of this $200 on the Form 8606 for conversion in 2021 would be zero, but it was not stated what other IRAs the spouse has which could have an effect.
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Topic Author
jackal981
Posts: 18
Joined: Fri Jan 21, 2011 10:06 pm

Re: 401k distribution and taxes

Post by jackal981 »

retiredjg wrote: Mon Apr 05, 2021 3:14 pm
jackal981 wrote: Mon Apr 05, 2021 3:04 pm My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
Your wife's brokerage sent a check? Or did the check come from the old 401k?

Why would your wife's brokerage send an unrequested check? Something seems amiss.
If the balance is below a certain amount, the plan can automatically liquidate it and send a check. The brokerage liquidated her old 401k and sent the check. My wife had rolled over he amount earlier in the year but the employer added a match later- This match was liquidated and we deposited it into a Rollover IRA.
livesoft wrote: Mon Apr 05, 2021 3:19 pm Years ago, my spouse received a check from an old ESOP when her employer was bought out in a bankruptcy. She ignored it until I asked about. Luckily she was able to deposit it into her IRA within the 60-day rollover period though it was close.

The OP's spouse could have something similar going on: Old 401(k) could require any small remaining amounts to be distributed. If she had done a previous indirect rollover in 2020, since only one is allowed, there could be a penalty, right? So the accountant could be right or could be wrong.

I suspect the cost basis of this $200 on the Form 8606 for conversion in 2021 would be zero, but it was not stated what other IRAs the spouse has which could have an effect.
You are correct. The auto liquidation was because of the small amount. She has no other IRAs other than the back door account. She converted her old 401k after rolling it over in 2020. But then the match money arrived. The penalty is painful but at least its a small amount. What I don't know is if I pay taxes on it in 2020 but deposit it in 2021, where do I report the basis....
retiredjg
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Re: 401k distribution and taxes

Post by retiredjg »

livesoft wrote: Mon Apr 05, 2021 3:19 pm The OP's spouse could have something similar going on: Old 401(k) could require any small remaining amounts to be distributed. If she had done a previous indirect rollover in 2020, since only one is allowed, there could be a penalty, right?
Not if the distribution came from a 401k. Once per year only applies to IRA to IRA 60 day rollovers.

I originally thought this was a distribution from a 401k which actually did meet the 60 day rollover requirement. But the post says "My wife's broakerage" sent the check.
retiredjg
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Re: 401k distribution and taxes

Post by retiredjg »

jackal981 wrote: Mon Apr 05, 2021 3:41 pm
retiredjg wrote: Mon Apr 05, 2021 3:14 pm
jackal981 wrote: Mon Apr 05, 2021 3:04 pm My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
Your wife's brokerage sent a check? Or did the check come from the old 401k?

Why would your wife's brokerage send an unrequested check? Something seems amiss.
If the balance is below a certain amount, the plan can automatically liquidate it and send a check. The brokerage liquidated her old 401k and sent the check. My wife had rolled over he amount earlier in the year but the employer added a match later- This match was liquidated and we deposited it into a Rollover IRA.
livesoft wrote: Mon Apr 05, 2021 3:19 pm Years ago, my spouse received a check from an old ESOP when her employer was bought out in a bankruptcy. She ignored it until I asked about. Luckily she was able to deposit it into her IRA within the 60-day rollover period though it was close.

The OP's spouse could have something similar going on: Old 401(k) could require any small remaining amounts to be distributed. If she had done a previous indirect rollover in 2020, since only one is allowed, there could be a penalty, right? So the accountant could be right or could be wrong.

I suspect the cost basis of this $200 on the Form 8606 for conversion in 2021 would be zero, but it was not stated what other IRAs the spouse has which could have an effect.
You are correct. The auto liquidation was because of the small amount. She has no other IRAs other than the back door account. She converted her old 401k after rolling it over in 2020. But then the match money arrived. The penalty is painful but at least its a small amount. What I don't know is if I pay taxes on it in 2020 but deposit it in 2021, where do I report the basis....
I think you are confusing what "the ole 401k plan" did with what "my wife's brokerage" did. Perhaps they are the same place and it seems the same to you, but the rules would be different.

Money that goes from 401k to IRA, directly or by 60 day rollover, is not subject to the "once per year" rule. It sounds like there have been two distributions from the 401k to your wife and that both got put into IRA before the 60 day time limit. If that is the case, there should be no penalty and no tax due either.

For each of those distributions, the 401k would have withheld 20% for federal tax withholding. This withholding is mandatory.

If the money moved in other ways than described above, you need to give more details.
Alan S.
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Location: Prescott, AZ

Re: 401k distribution and taxes

Post by Alan S. »

jackal981 wrote: Mon Apr 05, 2021 3:04 pm My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
The brokerage was likely acting as the plan administrator. In any event, the accountant is incorrect about taxes due for 2020 since the distribution was rolled over to a TIRA. The subsequent Roth conversion in 2021 will be taxable and reported in 2021.

She could have rolled the distribution directly to a Roth IRA without first rolling it to a TIRA. But if she had done that, the Roth rollover would have been reportable and taxable in 2020. Doing this in two steps means that the tax for the conversion will be due with the 2021 return on Form 8606. Maybe the accountant thought that the original 200 was rolled into a Roth IRA instead of the two step approach taken by your wife.

The 2021 8606 will show a 200 conversion. There is no TIRA basis unless she has TIRA accounts with basis added earlier from non deductible contributions. Without any TIRA basis, the 2021 conversion would be reported on lines 16 and 18 of Form 8606, with the taxable amount on line 18 moved to line 4b of Form 1040.
Topic Author
jackal981
Posts: 18
Joined: Fri Jan 21, 2011 10:06 pm

Re: 401k distribution and taxes

Post by jackal981 »

Thank you for the responses.
Alan S. wrote: Mon Apr 05, 2021 5:50 pm
jackal981 wrote: Mon Apr 05, 2021 3:04 pm My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
The brokerage was likely acting as the plan administrator. In any event, the accountant is incorrect about taxes due for 2020 since the distribution was rolled over to a TIRA. The subsequent Roth conversion in 2021 will be taxable and reported in 2021.

She could have rolled the distribution directly to a Roth IRA without first rolling it to a TIRA. But if she had done that, the Roth rollover would have been reportable and taxable in 2020. Doing this in two steps means that the tax for the conversion will be due with the 2021 return on Form 8606. Maybe the accountant thought that the original 200 was rolled into a Roth IRA instead of the two step approach taken by your wife.

The 2021 8606 will show a 200 conversion. There is no TIRA basis unless she has TIRA accounts with basis added earlier from non deductible contributions. Without any TIRA basis, the 2021 conversion would be reported on lines 16 and 18 of Form 8606, with the taxable amount on line 18 moved to line 4b of Form 1040.
retiredjg wrote: Mon Apr 05, 2021 3:54 pm
jackal981 wrote: Mon Apr 05, 2021 3:41 pm
retiredjg wrote: Mon Apr 05, 2021 3:14 pm
jackal981 wrote: Mon Apr 05, 2021 3:04 pm My wife's brokerage sent a check for $200 from a old 401k on Dec 21, 2020. We deposited the check into an IRA early February and plan to convert it to a Roth this year. My accountant says I would owe taxes and penalty on this for 2020:
1. Is this accurate?
2. How would I report the conversion and basis for the 200 in 2021 form 8606?
Thank you for your help.
Your wife's brokerage sent a check? Or did the check come from the old 401k?

Why would your wife's brokerage send an unrequested check? Something seems amiss.
If the balance is below a certain amount, the plan can automatically liquidate it and send a check. The brokerage liquidated her old 401k and sent the check. My wife had rolled over he amount earlier in the year but the employer added a match later- This match was liquidated and we deposited it into a Rollover IRA.
livesoft wrote: Mon Apr 05, 2021 3:19 pm Years ago, my spouse received a check from an old ESOP when her employer was bought out in a bankruptcy. She ignored it until I asked about. Luckily she was able to deposit it into her IRA within the 60-day rollover period though it was close.

The OP's spouse could have something similar going on: Old 401(k) could require any small remaining amounts to be distributed. If she had done a previous indirect rollover in 2020, since only one is allowed, there could be a penalty, right? So the accountant could be right or could be wrong.

I suspect the cost basis of this $200 on the Form 8606 for conversion in 2021 would be zero, but it was not stated what other IRAs the spouse has which could have an effect.
You are correct. The auto liquidation was because of the small amount. She has no other IRAs other than the back door account. She converted her old 401k after rolling it over in 2020. But then the match money arrived. The penalty is painful but at least its a small amount. What I don't know is if I pay taxes on it in 2020 but deposit it in 2021, where do I report the basis....
I think you are confusing what "the ole 401k plan" did with what "my wife's brokerage" did. Perhaps they are the same place and it seems the same to you, but the rules would be different.

Money that goes from 401k to IRA, directly or by 60 day rollover, is not subject to the "once per year" rule. It sounds like there have been two distributions from the 401k to your wife and that both got put into IRA before the 60 day time limit. If that is the case, there should be no penalty and no tax due either.

For each of those distributions, the 401k would have withheld 20% for federal tax withholding. This withholding is mandatory.

If the money moved in other ways than described above, you need to give more details.
The TPA was fidelity: They made the distribution in 2020 because it was less than 5k. We received the check in 2021. She also did the back door Roth.As an example, in her Tira,
she put 6k and converted to Roth.
She rolled over her old 401k (lets say 30k), paid taxes on it and converted it to a Roth.
But then her employer added the $200 to her account after the first rollover. Fidelity disbursed this and we got the check in 2021. Not we don't know how to report this. Do we simply say this was rolled over in form 8606 in 2020? And then prorate the conversion in 2020?
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k distribution and taxes

Post by retiredjg »

jackal981 wrote: Mon Apr 05, 2021 7:49 pm The TPA was fidelity: They made the distribution in 2020 because it was less than 5k. We received the check in 2021.
What happened to this money? Was this check deposited in tIRA within 60 days of the distribution?

She also did the back door Roth.As an example, in her Tira, she put 6k and converted to Roth.
Was this contribution for 2020 or 2021? When was the Roth conversion done?

She rolled over her old 401k (lets say 30k), paid taxes on it and converted it to a Roth.
What old 401k? You said above it was less than 5K. Is this a different 401k?

But then her employer added the $200 to her account after the first rollover. Fidelity disbursed this and we got the check in 2021.
What was done with this check? Was it deposited in IRA within 60 days of the rollover?

Not we don't know how to report this. Do we simply say this was rolled over in form 8606 in 2020? And then prorate the conversion in 2020?
What conversion in 2020?


This situation may be clear to you, but it is not clear to us. If you could list things in chronological order, it might be helpful. Amounts and dates are critical to answering your questions.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: 401k distribution and taxes

Post by livesoft »

jackal981 wrote: Mon Apr 05, 2021 7:49 pm.... Not (sic) we don't know how to report this. Do we simply say this was rolled over in form 8606 in 2020? And then prorate the conversion in 2020?
I do not understand the problem. There is a 1099R for this, so doesn't that inform one what has to happen on the tax return for this money that got put into an iRA. Is it just that the accountant gummed up your brain with their comment?
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Topic Author
jackal981
Posts: 18
Joined: Fri Jan 21, 2011 10:06 pm

Re: 401k distribution and taxes

Post by jackal981 »

retiredjg wrote: Tue Apr 06, 2021 8:38 am
jackal981 wrote: Mon Apr 05, 2021 7:49 pm The TPA was fidelity: They made the distribution in 2020 because it was less than 5k. We received the check in 2021.
What happened to this money? Was this check deposited in tIRA within 60 days of the distribution?

She also did the back door Roth.As an example, in her Tira, she put 6k and converted to Roth.
Was this contribution for 2020 or 2021? When was the Roth conversion done?

She rolled over her old 401k (lets say 30k), paid taxes on it and converted it to a Roth.
What old 401k? You said above it was less than 5K. Is this a different 401k?

But then her employer added the $200 to her account after the first rollover. Fidelity disbursed this and we got the check in 2021.
What was done with this check? Was it deposited in IRA within 60 days of the rollover?

Not we don't know how to report this. Do we simply say this was rolled over in form 8606 in 2020? And then prorate the conversion in 2020?
What conversion in 2020?


This situation may be clear to you, but it is not clear to us. If you could list things in chronological order, it might be helpful. Amounts and dates are critical to answering your questions.
Thank you for the feedback.
She did the back door Roth in Feb, 2020
She switched jobs in July 2020 and moved her 401k (50k) to a IRA and converted this to a Roth in July.
The employer put in her match ($200) into the account after she thought it was closed. This was later in July and we left it there.
Fidelity sent a distribution in December 2020 and now closed the 401k.
We received the check late but did deposit it within the 60 day period (Check date was Dec 21 and we deposited it in Feb 2021).
Hope that made sense.
The accounted thoroughly confused me and now, I don't know how exactly to report the $200 rollover.
MrJedi
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Re: 401k distribution and taxes

Post by MrJedi »

Your 2020 tax return should show this $200 distribution since the distribution occured in 2020. You need to indicate that it is a rollover and thus nontaxable.

When you Roth convert the funds, that will be a 2021 tax return item, since the conversion occured in 2021.
retiredjg
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Re: 401k distribution and taxes

Post by retiredjg »

I tend to agree partially with MrJedi, but would also like to hear what Alan S thinks.

My concern is that the $200 may have been a distribution to your wife which she later deposited in an IRA. This is OK except that to make it a complete rollover to IRA, she would have to "make up" the amount of tax withheld by the 401k when they sent her the check.

Example: Say her unexpected match (or whatever) was actually $250. Since this is such a small amount, they are allowed to distribute that directly to her. They would have withheld $50 taxes (made up number) and sent her a check for $200. The check would be made out to her instead of made out to her IRA at Vanguard.

She would be allowed to deposit that into IRA within 60 days (a 60 day rollover), but she should have deposited the entire $250 instead of just $200. Assuming she is not yet 59.5, that $50 amount that did not make it into tIRA is an early withdrawal from the 401k, subject to tax and 10% penalty.

On the other hand, if the check was made out to Her IRA at Vanguard and she sent them that actual check, then it is considered a direct rollover, no taxes would have been withheld, and no taxes and no penalty would be due...because the entire amount of the 401k got rolled into the IRA.


The same is true of the $50k she received in July 2020. However, for that amount, it is likely the check was made out to Her IRA at Vanguard and that she sent Vanguard that actual check.

My accountant says I would owe taxes and penalty on this for 2020:
Depending on whether this was a direct rollover (check made out to Her IRA at Vanguard) or a 60 day rollover (check made out to Her which she cashed/deposited in Her bank account) your accountant could be right. But tax and penalty would only be due on the amount of withholding ($50 in my made up example).
MrJedi
Posts: 589
Joined: Wed May 06, 2020 11:42 am

Re: 401k distribution and taxes

Post by MrJedi »

That's a good point. It's not clear (to me at least) if the check(s) received were for direct rollovers (no tax withheld) or payable to the taxpayer/individual for potential indirect rollover (tax automatically withheld).
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