IRA Transfer "Processing Fee"

[Burke]

TP had large 401(k) with company which was bought out, and employment was terminated. 401(k) was transferred in a direct-trustee-to-trustee transaction, but apparently it went through a 3rd party who deducted a "processing fee." So the amount rolled over was $45 less than the full amount of the account. This same outfit also issued a 1099-R for the transaction, showing the full amount of the account with a Code G. That is what was reported on the return and rollover indicated. However, the 5498 just issued from the receiving custodian is $45 less than this amount. Is it worth getting into a snit about this? Client is anal. This company says they have been instructed to do it this way, and the IRS has never questioned it. And I don't see any deduction here for the $45 either.

[spanel]

TP had large 401(k) with company which was bought out, and employment was terminated. 401(k) was transferred in a direct-trustee-to-trustee transaction, but apparently it went through a 3rd party who deducted a "processing fee." So the amount rolled over was $45 less than the full amount of the account. This same outfit also issued a 1099-R for the transaction, showing the full amount of the account with a Code G. That is what was reported on the return and rollover indicated. However, the 5498 just issued from the receiving custodian is $45 less than this amount. Is it worth getting into a snit about this? Client is anal. This company says they have been instructed to do it this way, and the IRS has never questioned it. And I don't see any deduction here for the $45 either.

I don't see how you can deduct. Even if the client was in the 25% tax bracket.. we are talking about $11. They will end up paying you more to research it then its worth. Move on.

Chris

[kathyc2]

I doubt $45 difference between 1099R and 5498 would generate a notice. If a notice was received a simple letter should clear it up.

No deduction for $45. This is functionally no different than any fees from IRA accounts. The fee reduces the balance and therefore future taxability, so in essence, it's already being "deducted".

[Rapid Robert]

No deduction for $45. This is functionally no different than any fees from IRA accounts. The fee reduces the balance and therefore future taxability, so in essence, it's already being "deducted".

Agree here. Besides, if your client is so "anal", why isn't he complaining that you are not showing a taxable distribution (plus early distribution penalty) from his 401k for $45, used to pay the fee? Then maybe he could also claim a deduction on Schedule A subject to 2% AGI, maybe that result would make him happier.

[Burke]

That's a thought. He could actually deduct it in that case as he is already over the 2% haircut. Over 59 1/2 too, so no penalty. There were two accounts for some reason, so it amounts to $90 for both. This method would result in practically no increase in net taxable income on the return, and certainly no increase in tax.

[kathyc2]

That's a thought. He could actually deduct it in that case as he is already over the 2% haircut. Over 59 1/2 too, so no penalty. There were two accounts for some reason, so it amounts to $90 for both. This method would result in practically no increase in net taxable income on the return, and certainly no increase in tax.

I'm confused. If it was rolled over where is the increase in taxable income? Also, remember that IRA fees need to be paid with funds outside the IRA to be deductible which does not seem to be the case here.

[Burke]

I was referring to the post above re: reporting the withheld fees as a taxable distribution (they were not included in the rollover), and then deducting them on Sche A.

[kathyc2]

I was referring to the post above re: reporting the withheld fees as a taxable distribution (they were not included in the rollover), and then deducting them on Sche A.

So, you are saying to show $90 as taxable income even though not necessary and then deduct it as A misc? More hoops than I would jump through even for an anal client.

[Burke]

Actually, had we known the full amount was not rolled over at the time the tax return was done, that is what we would have shown on the original return. It only came up when he got the 5498 recently from the new custodian, and he noticed the amounts were not the same as what we reported as a rollover on the return. I am advising the client to let it ride until and unless he may get a letter from the IRS regarding the discrepancy. Due to the amount, I am thinking they won't bother. Knowing this client, however, he won't.

[Snaggletooth]

Go to the Source

The OP says this particular client is anal.

I would tell him (her) that he needs to take this up with his custodian. This is not a tax issue. He will not spend the time and effort to get any concession from the custodian, probably a Fortune 500 company.

He is trying to put the burden of his discontent upon YOU, expecting YOU to do something about this. There may be a deduction available in cases where an expense or loss exceeds all cumulative income, but it is probably subject to a 2% floor.

If he expects YOU to do something about the fee with the custodian, tell him he will need to get permission to discuss with you, and then pay you $100/hr. The possibility that this could be a tax deduction is so remote it isn't even worthy of discussion.

[FEDUKE404]

Going with the facts

Is there an entry for "taxable amount" on the Form 1099-R ?

It is logical that everything was distributed from the original account, and a fee of $45 is certainly not unusual for the paperwork involved.

The amount shown on the Form 5498 is also consistent with the true facts of the distribution, i.e. everything except $45 of the original account went into the new account.

By default, you could make a case there was indeed a $45 taxable distribution which was used to pay the administrative fees.

With the facts at hand, I might be tempted to show the non-taxable / rollover amount on the Form 1040 as full amount less $45. But the presence of Code G may tell your software otherwise by default. Had there been no direct rollover, and a Code 7 on the Form 1099-R and the same facts with a qualifying non-direct rollover, then you could manually enter (somewhere in your software) "amount rolled over. . ."

I would not spend much time chasing a potential $45 deduction (which might not on the face even be allowable), but I might be more concerned with getting the "correct" amount shown for the taxable amount as the facts pretty well support a scenario where everything was not rolled over. The amount shown on the Form 5498 pretty much tells you what really happened.

FE

[Burke]

Is there an entry for "taxable amount" on the Form 1099-R ?FE

No. The full amount of the 401(k) account was shown in Box1; zero in Box 2; Code G in Box 7. I looked this company up (which is a 3rd party outfit) on Google and the reviews are not good. Mostly due to delays in receiving monies and fees charged. A quick calculation shows the net increase in tax is $12. I told the client not to bother with it until he heard something further, and remarkably, he agreed. He has already spent considerable time thrashing it out with this company. They of course insist they processed it correctly. The original company with which he was employed was sold, they terminated their plan, and apparently turned all accounts over to this independent outfit to handle the payouts.

[FEDUKE404]

Reporting fun

No. The full amount of the 401(k) account was shown in Box1; zero in Box 2; Code G in Box 7. I looked this company up (which is a 3rd party outfit) on Google and the reviews are not good. Mostly due to delays in receiving monies and fees charged. A quick calculation shows the net increase in tax is $12. I told the client not to bother with it until he heard something further, and remarkably, he agreed. He has already spent considerable time thrashing it out with this company. They of course insist they processed it correctly. The original company with which he was employed was sold, they terminated their plan, and apparently turned all accounts over to this independent outfit to handle the payouts.

Then you're just stuck with "the tax facts" versus "the Form 1099-R numbers".

The Form 5498 does seem to be correct, but I doubt if the IRS would even notice such a "discrepancy."

The potential difference in taxes is hardly worth the effort, although as a matter of principal I generally disdain "what difference does it make?" as an answer to a tax question. We won't even go into the "but I've done (something) that way for years and never had a problem" as a justification.

And then, you also have the scenario (I've had a handful) where the numbers for a Form 1099-R distribution with Code G were reported correctly on the tax return, the filed return clearly showed "ROLLOVER" per the rules, and at some point in the future the client gets a notice of taxes due on the full "distribution" even when a zero was displayed on page 1 of the Form 1040.

FE