1099R Form Redistribution Code Tax Question

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Topic Author
derauqsdm
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Joined: Sun Sep 06, 2020 1:44 pm

1099R Form Redistribution Code Tax Question

Post by derauqsdm »

I typically do our taxes as they have been simple in years past. I did our taxes this year through a CPA as we did a lot of new things this year, and wanted to make sure the correct forms and filings were performed. One of those new things we did was a backdoor Roth. After reminding the CPA 3 times about the 8606 form, he finally started the process and noted that each of our Fidelity 1099R distribution code in box 7 was a 2 instead of an N (or R). He claimed that we did the conversion incorrectly and he could not do an 8606 form for us. I felt we did the conversion correctly (placed 6k in our tIRA accounts that were otherwise empty, transferred those funds to our roth IRA - each took about 1 week with Fidelity). I tried to explain the process we did for them to see if he had any thoughts on what happened and he got to the point of slamming his hands forcibly on the table and exclaiming I could not force him to produce an 8606 without the corrected 1099R.

We were otherwise done, so I went ahead and finished the taxes so I could come here and see if I did the conversion wrong (as it was the first time we did this, certainly felt I could have but I think I did it right). After looking through some old posts, I saw some discussions that this can happen with the Redistribution Code, but a 8606 can still be produced and filed.

Who is correct in this situation?
If I am correct can I file an amendment to our taxes with the 8606 forms?
If he is correct, do I just call Fidelity and see what I did wrong? - I already did my 2021 Backdoor the same way, but I put the funds in my wife's tITA last week and it will be ready to convert today, so I can get Fidelty to help guide me if needed at the same time.
livesoft
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Re: 1099R Form Redistribution Code Tax Question

Post by livesoft »

A little internet search has this for Code 2 in Box 7.
https://thelink.ascensus.com/articles/2 ... tion-codes

I'm sure other places have the same.

More important is probably whether the Check Box is checked or not. I see lots of people missing this on this forum.

There is no rush to submit one's taxes, so your accountant has plenty of time to research this or get fired.
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Topic Author
derauqsdm
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Re: 1099R Form Redistribution Code Tax Question

Post by derauqsdm »

Checkbox is checked for both of us

Unfortunately already submitted. He claimed it didnt make a difference and could be amended at a later date.

I should have done this earlier, tried to do it on my own and hit snags with some tax savings investment stuff so found a CPA. I'm on call for 12 days straight and my wife is due any day with baby, so I ended up just finishing and paying our taxes as the next month is going to be crazy with the plan to amend if needed. Not the right choice but definitely will not be going back.
Last edited by derauqsdm on Mon Apr 12, 2021 8:08 am, edited 1 time in total.
livesoft
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Re: 1099R Form Redistribution Code Tax Question

Post by livesoft »

Also note that codes N and R that you mentioned are NOT for conversions, but are for recharacterizations. Those are two different things. If there is a vocabulary issue here, then get that straightened out or if it cannot be straightened out lose the loser.

Also ask them to pay you for their "continuing education" credits.
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Topic Author
derauqsdm
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Re: 1099R Form Redistribution Code Tax Question

Post by derauqsdm »

livesoft wrote: Mon Apr 12, 2021 8:07 am Also note that codes N and R that you mentioned are NOT for conversions, but are for recharacterizations. Those are two different things.
I said this exact thing!!- "Are you sure that's not for a recharacterization amd not a conversion?" And he said I was wrong. He even mentioned he is a CFA so sees this all the time.

I am new to all this and felt like I was right but backed down. I am feeling justified
Katietsu
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Re: 1099R Form Redistribution Code Tax Question

Post by Katietsu »

There is definitely something wrong here. If he is a CFA and CPA, he should be familiar with a Roth conversion. So there is some miscommunication or he is incompetent.

Yes, you can file an amendment. The CPA should file it for free actually if you gave him the right information. But I can understand why that might not be worthwhile to deal with.

If there is no 8606, then he did not report the non deductible contribution to the traditional IRA nor did he report the conversion to the Roth? Just left both completely off your tax return? It really sounds like he is thinking you did a recharacterization.

You have time to get to the amendment. There are no taxes due, just reporting. It will be months, or probably longer before the IRS contacts you for not reporting the conversion.

One option is to get Turbotax and do your tax return without the IRA related stuff. Hopefully, this will match the results of your CPA. At the end, tell Turbotax that you will be filing on paper. Make sure you go the whole way through with the charade. You can then use Turbotax to prepare the amended return.

Congratulations on the baby.
livesoft
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Re: 1099R Form Redistribution Code Tax Question

Post by livesoft »

If your income is low enough to make a direct Roth IRA contribution, then there would be no need to make a non-deductible traditional IRA contribution, then convert it to a Roth.

I would not use the word "Backdoor" at all.
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retiredjg
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Re: 1099R Form Redistribution Code Tax Question

Post by retiredjg »

It appears to me you did the process right (assuming there were no other IRAs except Roth IRA).

It also appears to me you did a Roth conversion, not a re-characterization. And I think your 1099 is correct as well.

It is one of the great mysteries....lots of tax-preparers don't know what to do with the backdoor Roth process. You are not alone. We have seen various versions of this many times.



It is not clear to me if your tax amount is correct or not. And I'm not sure what the exact fix will be. It could be simple and will certainly be simpler the sooner you do it since it is fresh on your mind.

1. Is it correct that no Form 8606 is was done?

2. Can you tell if you were taxed on that $12k? ($6k each)

3. What does Line 4 (both a and b) say on the 1040?
Topic Author
derauqsdm
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Re: 1099R Form Redistribution Code Tax Question

Post by derauqsdm »

retiredjg wrote: Mon Apr 12, 2021 8:38 am
1. Is it correct that no Form 8606 is was done?

2. Can you tell if you were taxed on that $12k? ($6k each)

3. What does Line 4 (both a and b) say on the 1040?
1. Correct, no 8606 was done
2. I was not taxed on the 12k (just the initial tax in the income)
3. I will have to check when I get home tonight
Asyouwish
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Re: 1099R Form Redistribution Code Tax Question

Post by Asyouwish »

You can file the Form 8606 as a stand alone form. You do not need to have a 1040X unless the tax is changing.

https://www.irs.gov/pub/irs-prior/f8606--2020.pdf

Page 2 has a place to sign. Which is why it can be submitted by itself.

If you want, fill out the 8606 by hand for you and your spouse. Keep a copy with your tax return. Mail the original to the IRS. Use the address for mailing a paper return. The IRS website will have the addresses.

Form 8606 is not hard. Part I and Part II. Follow the instructions.


Consider another tax preparer.
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retiredjg
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Re: 1099R Form Redistribution Code Tax Question

Post by retiredjg »

derauqsdm wrote: Mon Apr 12, 2021 12:15 pm 1. Correct, no 8606 was done
2. I was not taxed on the 12k (just the initial tax in the income)
3. I will have to check when I get home tonight
Depending on what you find on line 4, the fix for this might be as simple as filling out two Forms 8606 (his and hers) and mailing as described by the previous poster.

At first, I considered that you might not need to do anything at all since it appears your taxes may not change. But...it seems your tax preparer thinks you recharacterized from tIRA to Roth IRA and your income is probably too high to contribute to Roth IRA. This may cause the IRS to send you an inquiry two years from now. Best to avoid that annoyance by sending in corrected Forms 8606 this year.

Can you follow the tax forms well enough to know for sure that the tax forms will not change if the return is handled properly by using the 8606?

After knowing what line 4 says, it may be a little clearer.
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Duckie
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Re: 1099R Form Redistribution Code Tax Question

Post by Duckie »

derauqsdm wrote: Mon Apr 12, 2021 7:45 am he finally started the process and noted that each of our Fidelity 1099R distribution code in box 7 was a 2 instead of an N (or R).
Box 7 code 2—Early distribution, exception applies (under age 59 1⁄2).
If you're under age 59.5 and take money out of your TIRA and convert it, Box 7 is supposed to be a 2. The conversion is the exception. As long as Box 2b is checked, you're good. You will need to amend the return and add Form 8606. Your CPA is stupid.
HomeStretch
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Re: 1099R Form Redistribution Code Tax Question

Post by HomeStretch »

In connection with a backdoor Roth, I would expect your/spouse’s 2020 Form 1099-Rs to each report:
Box 1 - $6,000
Box 2a - $6,000
Box 2b - both boxes checked
Box 7 - Code 2 and “IRA/SEP/SIMPLE” checked

Double check the Form 1040 prepared by the CPA:
1. Were the $6,000 x 2 traditional IRA (tIRA) contributions deducted on your Form 1040? (they should not be)
2. Were the $6,000 x 2 distributions from the tIRAs reported on Forms 1099-R included as income on your Form 1040? (they should not be)

Did you or spouse have any 12/31/20 pretax IRA balance in a rollover/Traditional/SEP/SIMPLE IRA (if you did, your Roth conversion(s) will be subject to pro-rated taxes).

If everything above checks out, +1 to filing Forms 8606 (if they are not included in the 2020 Form 1040 filed by your CPA) for you/spouse as suggested. And perhaps do your own taxes again or find another tax preparer next year.
Katietsu
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Re: 1099R Form Redistribution Code Tax Question

Post by Katietsu »

HomeStretch wrote: Mon Apr 12, 2021 6:01 pm In connection with a backdoor Roth, I would expect your/spouse’s 2020 Form 1099-Rs to each report:
Box 1 - $6,000
Box 2a - $6,000
Box 2b - both boxes checked
Box 7 - Code 2 and “IRA/SEP/SIMPLE” checked

Double check the Form 1040 prepared by the CPA:
1. Were the $6,000 x 2 traditional IRA (tIRA) contributions deducted on your Form 1040? (they should not be)
2. Were the $6,000 x 2 distributions from the tIRAs reported on Forms 1099-R included as income on your Form 1040? (they should not be) But the $12,000 should be reported on line 4a

Did you or spouse have any 12/31/20 pretax IRA balance in a rollover/Traditional/SEP/SIMPLE IRA (if you did, your Roth conversion(s) will be subject to pro-rated taxes).

If everything above checks out, +1 to filing Forms 8606 (if they are not included in the 2020 Form 1040 filed by your CPA) for you/spouse as suggested. And perhaps do your own taxes again or find another tax preparer next year.
HomeStretch
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Re: 1099R Form Redistribution Code Tax Question

Post by HomeStretch »

Katietsu wrote: Mon Apr 12, 2021 6:45 pm
HomeStretch wrote: Mon Apr 12, 2021 6:01 pm 2. Were the $6,000 x 2 distributions from the tIRAs reported on Forms 1099-R included as income on your Form 1040? (they should not be) But the $12,000 should be reported on line 4a
I agree.

I should have said “... included as income subject to tax on your Form 1040...”. OP, Line 4b should be zero.
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