Help on IRA

[TaxBird]

I need some help on a situation I have with an IRA.

In June 2006 TP withdrew $5K from his 401K$$ at the same time he rolled over to an IRA. In August 2006, TP withdrew $8K but 'paid the money back within 60 days'.

TP has a 1099R that shows a $43K NT distribution. He also has another 1099R showing a taxable distribution of $13K (I'm assuming & TP confirms that this is the $8K & $5K).

Further, the 2006 Form 5498 shows a total rollover contribution of $51K (I'm assuming the $43K + $8K).

Based on these facts, I have the following questions:
1. Is the $8k portion to be considered a 'contribution' or a 'rollover'?
1a. If a contribution, then should $4K be considered excess and carried over to 2007?
1b. If a rollover, how do I show the corrected amount (vs the $13K 1099R)
2. By treating his IRA like a 401K, did my TP inadvertantly perform a 'prohibited transaction'? If so, what are the rammifications of this and what are my responsibilities in this regard?

Any help or direction would be greatly appreciated.

Thank you in advance!

[TaxBird]

After sleeping on this...

I decided I would handle this situation as follows:
Treat $8K as rollover contribution
Treat $13K as taxable distribution
Keep my mouth shut on the treating the IRA like a 401K - except to inform tha TP that different rules may apply.

And say a little prayer that I am correct.

[TaxBird]

Ok

I decided to extend.

Too much complexity for me. Plus I feel silly replying to my own posts.

Maybe I can re-post this another day when we are all less brain-fried.

[jasdlm]

What I would do

Okay, TB . . . here's the way I see it:

1) 5,000 should be reported on lines 16a and 16b as taxable distribution from 401(k)
2) 8,000 should be reported on line 15a and $0 on line 15b. (If I read your post correctly, the 8k actually came out of the IRA after the rollover from the 401(k).)
3) "Rollover" should be entered next to line 15b (see page 25 of the 1040 instructions)
4) No contribution based on the $8,000, and no 'carry forward'. You can't 'carry forward' an IRA contribution to my knowledge; if you did have a client who made an overcontribution in any given year, you should get them to have the IRA custodian reverse it prior to the unextended tax filing deadline; otherwise, form 5329 for overcontribution. Anyway, N/A in this situation.
5) I don't see any prohibited transaction. Check out Pub 590 for 'Prohibited Transactions'

jas

[jasdlm]

Ooops . . . amendment

Just realized that the 1099r's were reported differently than the way I understood your facts. It appears that the $5,000 must have come from the IRA, so:

$43,000 on 16a and 0 on 16b
$13,000 on 15a and 5,000 on 15b

Same net result.

Sorry.

Jas

Excuse me if this is posted twice . . . I don't know how to use the edit function.

[TaxBird]

Okay, TB . . . here's the way I see it:

1) 5,000 should be reported on lines 16a and 16b as taxable distribution from 401(k)
2) 8,000 should be reported on line 15a and $0 on line 15b. (If I read your post correctly, the 8k actually came out of the IRA after the rollover from the 401(k).)
3) "Rollover" should be entered next to line 15b (see page 25 of the 1040 instructions)
4) No contribution based on the $8,000, and no 'carry forward'. You can't 'carry forward' an IRA contribution to my knowledge; if you did have a client who made an overcontribution in any given year, you should get them to have the IRA custodian reverse it prior to the unextended tax filing deadline; otherwise, form 5329 for overcontribution. Anyway, N/A in this situation.
5) I don't see any prohibited transaction. Check out Pub 590 for 'Prohibited Transactions'

jas

Thanks for your response Jas. I'm going to reply to your post out of order as I also saw your second post - to which I will respond separately.

Re: Item 4: I was referring to the TaxBook suggestion (p13-11) "Another way to handle an excess contribution is to pay the 6% penalty on the excess and leave it in the IRA. In the following year, under contribute to the IRA for that year and apply the prior year excess contribution to the current year contribution."

Re: Item #5: This is the part that has my brain short circuited. I can't reconcile the prohibition against 'taking loans' (or rather 'loans to disqualified persons') with the ability to withdraw $$ NT if it's paid back in 60 days and this type of transaction occurs not more than one time in a 12 mo period.

Pub (p.47) says "Borrowing money from it" . Sec 4975 (c)(1)(B) says "lending of money or other extension of credit between a plan and a disqualified person".

Either way, seems to me the fact of taking out the $$ and putting back made it a borrowing/loan.

I've currently pulled SS4975 to see if I can't dig out the definition of a 'disqualified person'. So far, I can't seem to find where he actually 'did' a prohibited transaction (not falling under 'disqualified person' as far as my first three passes through the section draw me to conclude) but I want to make sure.

In any case, seems to me I'm missing something. The brokerage statement detail shows the repayment as a 'rollover'. But I've come to not entirely trust what they say - at least not without independent confirmation.

[TaxBird]

Just realized that the 1099r's were reported differently than the way I understood your facts. It appears that the $5,000 must have come from the IRA, so:

$43,000 on 16a and 0 on 16b
$13,000 on 15a and 5,000 on 15b

Same net result.

Sorry.

Jas

Excuse me if this is posted twice . . . I don't know how to use the edit function.

No, the $5K came at the same time the 401K was rolled over - never made it to the IRA.

In any case, this is what was inclined to do but for the 'loan issue' (discussed in prior post) and the $13K 1099R. Where I got hung up here is that the 1099R for the $13K shows taxable distribution of $13K in box 2a then has box 2b marked. Meanwhile, the TP got the $$ in & out in 60 days so if truely NT then it should (in my mind) have been reflected in the 10099R.

This led me to try & dig out whether or not I was correct on just showing the $5k as taxable even though the 1099R showed a different number. Off the top of my head, I didn't know if the proper procedure was to just 'show' the $5,000 taxable part (contrary to the 1099R) or if there was some calculation that had to be performed/ form or statement to attach. (Limited experience in this area).

This, in turn, led me down a long, ugly, non-productive path that took me all day. In any case, it was my own doing. I should have pulled up and just extended earlier.

That is why your reply is so appreciated.

Thanks again!