Form 8606

[jjtrcka22]

I have a client that made nondeductible traditional ira contributions.  I know those get reported on line 1.  They also had a rollover from their previous employer to a traditional ira (they got a new job).  Part of that rollover was taxable.  They have never had to file form 8606 before, but should the taxable part of the rollover be put on line 2 and added to the basis?  Thanks!

[qbteachmt]

"Part of that rollover was taxable. They have never had to file form 8606 before"

We're going to need more details, then. Typically, nothing is taxable unless it also is converted. A Rollover from a tax deferred plan/account to a tax exempt plan/account, such as 401(k) to Roth 401(k), is taxable. Or both 401(k) and designated Roth to Roth IRA, is taxable. The types of plans/accounts matter, because there likely was supposed to be a Form 8606. Or perhaps it was some sort of ESOP? Are you sure it was "rolled" to an IRA account? There was a topic posted here last week about TSP-to-IRA, which isn't even allowed, for that taxpayer.

[jjtrcka22]

It was supposed to be a rollover from their 401k they had with their previous employer to a traditional IRA.  But part of it was taxable.  I guess I need to get the client to check with their previous employer.  

[jjtrcka22]

Some more information until I hear back from the client:

Using hypothetical numbers:

On the 1099r:

Box 1: 25,000

2a.: 5,000

2b.: Total Distribution

5: 20,000

7: Code G - Direct Rollover

[jjtrcka22]

The only thing I can think of is that maybe part of the 401k was not rolled over within the 60 days, and it became taxable?

[qbteachmt]

Code G means direct, so there is no way your taxpayer would not have made a 60-day window, because they were not involved in that rollover activity.

If this was 401(k) to Roth, with there being post-tax employee contributions (the Box 5 amount), then the $5k was pre-taxed (untaxed, if you like) would be taxable, and now it is converted to Roth. The $20 might be Roth 401(k)? Or, Designated Roth from the 401(k)? The point being, you have pre-tax and post-tax, apparently. What you need to confirm is like-for-like, or not.

Form 8606 is where you track new contributions and conversions. They never had to use that form if they only had employer plan activity.

[jjtrcka22]

Thanks!  It was only employer plan activity that got rolled over, but they are checking to see exactly what the taxable part was.  It was all rolled over to a traditional IRA.  Their 5498 shows the total amount of the distribution (including the taxable amount) as a rollover into a traditional IRA.

[jjtrcka22]

O.k. Client just got back to me.  They said the HR person told her that what was rolled over to the traditional IRA was her pension plan with them that wasn't a 401k. The HR person said that the employer contributions to the pension had to be taxed.  Has anyone ever heard of that?

[jjtrcka22]

The client talked to another HR person.  They said her contributions didn't get taxed in the rollover, but they said since she was vested in the pension plan, the amount contributed by the employer was taxable.  

[qbteachmt]

"The HR person said that the employer contributions to the pension had to be taxed. Has anyone ever heard of that?"

Perhaps it is a nonqualified plan? Was it covered under ERISA?

"her contributions didn't get taxed in the rollover, but they said since she was vested in the pension plan, the amount contributed by the employer was taxable."

Okay, but then you either have basis going forward (Form 8606), or that could have been rolled to Roth. What a mess. So many variations. You might start here:

https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

And this chart:

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

You might ask around to find a mentor. It is possible you'll find another tax preparer who has clients from that same situation.

[jjtrcka22]

I appreciate all the help.  I'm mainly just trying to make sure it does not get taxed twice.  Since the employer taxed it and put it in the traditional IRA, I'm leaning toward putting it on form 8606 so it is at least not taxed later down the road.