In 2012 I finally rolled over an old a balance from the Teacher Retirement System of Texas(TRS) public pension plan to a Roth IRA. It was a direct rollover, straight from TRS to the Roth IRA. My 1099r says, in box 2a, that the taxable amount of the distribution is $0. Why? I thought it was all taxable, which seems to be what I’m reading online. Could this be an error or am I missing something?
(I am not a Tax Attorney).
Was your contribution to your public pension with after-tax money? If so, then a tax free rollover to a Roth would seem to me to make sense. You had no constructive receipt so simply rolling it over into a different account wouldn’t seem to be a taxable event.
My quick search of the TRS benefits handbook shows contributions are made on a pretax basis so I don’t think that’s it. Thanks for taking a stab at it.
This is from the handbook in case anyone is interested.
“As a TRS member, you contribute 6.4 percent of your eligible compensation as your share of the funding for your benefits. Your employer is required to deduct the contributions from your salary on a pre-tax basis and forward them…”
Sounds like an error to me.
Didn’t you already pay taxes on it during the original contribution to the pension fund? I don’t know anything about tax law, either, but I’m pretty sure they don’t tax you twice on it.
It’s my understanding that I have not yet paid taxes on it since the contributions are in made on a pre-tax basis. But I’m obviously confused here or there is an error.
The State of Texas accidentally your entire IRA.
Does it say zero taxable or is the box blank? If blank, is there a little check-box underneath that says “taxability not determined” or something to that effect?
I’m pretty sure that a direct rollover from one IRA to another IRA is nontaxable. From here:
Note that he is rolling over contributions from a pension system that he says were made on a pre-tax basis. What that means is, those contributions were taken off “the top” of gross earnings and lowered his taxable income. He has not paid income taxes on those earnings yet. (That is one of the advantages of pre-tax contributions to retirement plans, it lowers your tax burden in the here and now.)
If he was doing a rollover to a regular IRA there would be no taxable event, because a regular IRA you can generally make tax-deductible contributions to and only pay tax when you withdraw from the plan. So in that scenario mcgato would be correct, but the OP is saying he rolled his contributions into an Roth IRA.
A Roth IRA you’re funding with after tax dollars, which means there is no real tax benefit in the here and now. However, you get tax free growth just like a regular IRA and you never pay tax on withdrawals. (The TRS system also wasn’t an IRA at all, but more like a 401k for tax purposes because it was funded with pre-tax payroll deductions, a regular IRA you typically fund with available money after taxes but the contributions can later be deducted when you file your income taxes for the year. However the amount that is deductible is based on income, and if you have a workplace retirement plan the deductibility is significantly lower than for people without one.)
So the move to the Roth IRA should indeed have triggered a taxable event.
How smart are the people in the TRS pension office?
I worked for a private company, in Canada, and found that mix-ups like this were common.
Your choice is t call and clear it up; pay taxes. Or… ignore it, risk that someone eventually catches it and you owe the taxes and interest. I guess the question is - are there penalties involved if they catch it down the road? Will they say “OK, you did what the paperwork said, no penalty”? Or “you should have been smart enough to catch this (see, you are) so we assume you deliberately skipped taxes, penalty applies.”
Depends, I guess, did you teach math or teach english?
Not a tax advisor, but yes – bad ones. Years from now, they can treat the entire account funds as “comingled,” and make you pay taxes even on what you’ve already paid taxes on. Get it fixed now.
I’m not even sure if it’s a question of “smart” - a company often doesn’t track the information necessary to tell you whether it is taxable or not. When they don’t know, they check a box on the form (Taxable Amount not Determined) and then they either put the whole amount in 1099-R 2a (figuring that people are better off paying too much tax than too little) or they leave 1099-R 2a blank (as a prompt that people have to figure it out themselves).
Which is not to say that 1099-Rs are all correct - you really do have to double-check them.
Based on the information in this thread, I’m thinking that the amount is taxable. Proving otherwise would require some analysis of your pay stubs while the contributions were being made.
My guess is that most pension and 401(k) rollovers are to conventional tax-deferred IRAs, which may be the reason that the TRS didn’t report the rollover as taxable. In fact, I wonder if the rollover form allowed the OP to specify that the money was going to a Roth IRA.
The taxable amount actually says “0.00.” The “taxable amount not determined” box was not checked, which means they determined that my taxable amount was zero for some reason. I really knew it was completely wrong when I looked up the distribution code from box 7. Code ‘G’ would mean it went to a traditional IRA, not a Roth.
So I called TRS saying it was wrong and they assured me they did everything right and I needed to contact Vanguard, which I did. I still don’t know exactly what got screwed up. The money went directly from TRS to my Roth. Vanguard told me the Roth account number was written on the check. Vanguard said something about getting my paperwork(form printed by TRS which I filled out and sent to Vanguard to finish filling out so they can send it back to TRS telling them to send the check and that its going into a Roth) and the check months apart and treating them as separate transactions. I didn’t really understand what that meant, and by that time I stopped caring, I just wanted to fix the problem. He talked with one of the senior advisers and they told me to fill out a 8606 which basically converts the pretend traditional IRA that my 1099r tells about, to a Roth. I asked if I could just cross out the wrong boxes and hand write in the correct taxable amount and distribution code(2 I think), but he said that was a really bad idea.
And for those wondering, it really was not a option to just not pay the taxes. Vanguard sends the IRS a 5498 verifying where the money went. If it doesn’t match what to 1099r says, then major pain in the ass. I guess the 8606 is what reconciles the two in my case.
Oh, and the form I filled out from TRS had Roth all over it. I checked a box that says “Do not withhold tax from my rollover to a Roth IRA.” I then sent that to Vanguard who filled out the bottom and checked the Roth IRA box, then sent it to TRS. Of course I don’t get a copy after I sent it to Vanguard so I can’t tell if they screwed that part up or what.
And how I recognized there was a problem in the first place…
I did my taxes on paper, not reading the forms in detail. I put the full amount on the IRA distributions line just because I knew I owed taxes on the full amount. I then started a free file online. It calculated a much larger refund because I don’t fill out the 1040A itself, I just enter info from my tax forms, which obviously gave a taxable amount of zero for my distribution.
Did you intend for it to be rolled over into a Roth vs. a traditional? Were you expecting this and do you have the money set aside to pay the taxes?
As I understand it, it’s legal to move money from a traditional IRA to a Roth (“conversion”) but you have to treat it as income for that year, and pay taxes (federal and state) on the full amount so converted.
I would definitely contact the workplace plan and ask about having the 1099 re-issued. And/or contact the IRS to find out what to do in this situation since you know the 1099 was incorrect.
I had something reported wrong once, though in the other direction: an inherited IRA, the CD had expired and was about to renew, so I went to the bank and had them put it into a money market account instead of a CD. They reported it as if I’d taken the whole thing as a taxable distribution, which did fairly scary things to our tax bill that year. Fortunately they corrected their error and issued a corrected 1099.
Do you really think the computers do that much reconciling?
Listen to this man for he is wise.
I rolled my non-Roth IRA into a Roth this year. After I put in my W2s on Turbotax and I was in the green. Then I put in my 1099-R and it swung about $4000 and now I owe those bastiges money.
The OP should get this fix now while he/she will still only owe taxes instead of taxes and fines later.