Employer plan rolled over to a Roth IRA is there a 10% penalty?

[nwtaxlady]

New client, had taken his small employer plan that was deferred compensation and company match and rolled it over to Edward Jones into a Roth IRA and this was a direct rollover. He never saw the money.
The 1099-R from the employer plan is coded G. I have a form 5498 from Edward Jones and it has in box 2 for Rollover contributions of the exact same dollar amount and also the box 7 is marked for ROTH IRA.

1. Can they do that? From employer plan to Roth IRA? I know they can from IRA to Roth IRA.
2. He has to pay tax on it, so the code G is wrong.
3. Is it subject to the 10% penalty? He is under 59 1/2.

So how do I handle this when the 1099-R is coded G?

Thanks.

[New York Enrolled Agent]

New client, had taken his small employer plan that was deferred compensation and company match and rolled it over to Edward Jones into a Roth IRA and this was a direct rollover. He never saw the money.
The 1099-R from the employer plan is coded G. I have a form 5498 from Edward Jones and it has in box 2 for Rollover contributions of the exact same dollar amount and also the box 7 is marked for ROTH IRA.

1. Can they do that? From employer plan to Roth IRA? I know they can from IRA to Roth IRA.
2. He has to pay tax on it, so the code G is wrong.
3. Is it subject to the 10% penalty? He is under 59 1/2.

So how do I handle this when the 1099-R is coded G?

Thanks.

You don't indicate the type of plan. Perhaps it was a 401(K) Roth plan. Then this might make sense.

[nwtaxlady]

Client didn't know for sure what to call employer plan. He said he deferred some of his paycheck into it and company matched some. So he believes it is all pretaxed dollars and should be taxed.

He had an new Edward Jones guy, young & inexperienced, and rolled it into a ROTH IRA direct transfer to Edward Jones. We have a form 5498 that has the same exact dollar amount for Rollover contributions and marked for Roth IRA.

He didn't care for this Edward Jones guy and transferred his accounts to another Edward Jones Rep with more experience and this guy explained to him that normally they would rollover the Employer Plan to a traditional IRA then from there roll it over to a ROTH IRA. And that is how it should have been handled.

So I know it has to be taxed. But what about the 10% penalty he is not 59 1/2.

I look at it this way..... if he took the money out of the Employer plan yes he would pay the 10% penalty. Then he just made a contribution to his ROTH IRA which happens to be the same dollar amount.

What are your thoughts??

[Snaggletooth]

Don't Think So

I don't believe he should be assessed the 10% penalty if he didn't touch the money. See TTB Page 13-14, under Conversion Contributions. I don't see where the rollover from an employer's plan makes any difference.

[Roland Slugg]

I'd like to offer a few comments in response to your posts, as well as the other posts above, in the hope of clearing things up and assisting you and your client.

You are correct that if the distribution went from a deferred account to a Roth IRA, the full amount is taxable. You said the 1099-R form is coded G, and if that 1099-R is correct ... by no means a certainty ... then the distribution was, indeed, from a tax deferred account. NYEA asked above if the distribution might have come from a "Designated Roth" account, but if it had, the 1099-R should have been coded H, not G. However, it would still be a good idea to make sure about this.

Next, I'm not certain that a distribution from a company plan can be rolled over directly into a Roth IRA. As the second Edward Jones rep said, the usual practice is to roll a distribution first into a traditional IRA, and then into a Roth IRA ... a 2-step process. (Personally, I don't see what difference it makes, but maybe it does.) Your client's first Edward Jones rep may very well have made a type of transfer that is not allowed under the IRA distribution and rollover rules. That second EJ rep may be able to assist with this.

If the distribution from the company plan directly into a Roth IRA is allowed (see above), then it was a "conversion." Conversions from an IRA to a Roth IRA are taxable, but they are not subject to the 10% premature distribution tax. (Code §408A(d)(3)(A)(ii) and Regs §1.408A-4 Q&A 7)

If the taxpayer does not wish to report the distribution as taxable and pay the tax thereon, he may "recharacterize" the distribution, retroactively to the date is was made, into a traditional IRA. Doing this should also render moot the possible issue of the "not permitted" rollover from an employer plan directly into a Roth IRA.

Finally, if your client wishes to recharacterize the distribution, he needs to act fast. He has only until October 15th to get it done. There are notification requirements for a recharacterization that must be met. Hope this helps.

[kathyc2]

Most investment places will first roll to IRA and then convert to Roth, although you can go directly from 401K to Roth.
If they used the 2 step process you may just be missing the 1099R from EJ when converted.
No penalty but fully taxable.
Software will vary on how to enter it to make it show as taxable. In ProSeries you can enter with code g and then make taxable on B4 on Additional Distribution Information.
I don't believe the info we enter in our software for a 1099R worksheet gets transmitted, so I don't see what the problem would be to enter code 2 instead of g on your software is that's what you need to do to have it compute correctly.

[New York Enrolled Agent]

Roland - good catch on code H rather than G.

You commented:Next, I'm not certain that a distribution from a company plan can be rolled over directly into a Roth IRA. As the second Edward Jones rep said, the usual practice is to roll a distribution first into a traditional IRA, and then into a Roth IRA ... a 2-step process. (Personally, I don't see what difference it makes, but maybe it does.) Your client's first Edward Jones rep may very well have made a type of transfer that is not allowed under the IRA distribution and rollover rules. That second EJ rep may be able to assist with this.

If the distribution from the company plan directly into a Roth IRA is allowed (see above), then it was a "conversion."

I've pasted a small snip from Notice 2008-30. It does show the ability to go directly to a Roth and confirms your comments on a "conversion". There are a series of Q&A in this notice for those who wish to read more on this topic.

II. SECTION 824 OF PPA ’06

Prior to amendment by PPA ’06, § 408A of the Code provided that a Roth IRA could only accept a rollover contribution of amounts distributed from another Roth IRA, from a nonRoth IRA ( i.e. , a traditional or SIMPLE IRA) or from a designated Roth account described in § 402A. These rollover contributions to Roth IRAs are called “qualified rollover contributions.” A qualified rollover contribution from a nonRoth IRA to a Roth IRA is called a “conversion.” An individual who rolls over an amount from a nonRoth IRA to a Roth IRA must include in gross income any portion of the conversion amount that would be includible in gross income if the amount were distributed without being rolled over. For distributions before 2010, a conversion contribution is permitted only if the IRA owner’s adjusted gross income does not exceed certain limits.

Section 824 of PPA ’06 amended the definition of qualified rollover contribution in § 408A of the Code to include additional plans. Under this expansion, in addition to the rollovers described in the preceding paragraph, a Roth IRA can accept rollovers from other eligible retirement plans (as defined in § 402(c)(8)(B)). The amendments made by § 824 of PPA ’06 are effective for distributions made after December 31, 2007.

[Y2KEA]

This chart may help:

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

[nwtaxlady]

Thank you everyone for your input. Client agreed that the amount rolled over from company plan to Roth IRA needed to be taxed. So that's what we did with no 10% penalty.
Thanks again!

[JON]

I do think starting in 2015 you can get rollovers from 401Ks to IRAs directly. In fact it seems about a year ago one of the hot topics was not to rollover 401Ks directly to IRAs to get to Roths. Especially if you have after tax contributions in the 401Ks. When you have rollovers from regular IRA to Roths' if not complete you allocate after tax to the total in the IRA can give you an answer you will not like as much. MAYBE