How are 457 to Roth IRA rollover taxes handled?

Question

Today I started filling out my form 1040, and noticed 2 discrepancies in the 1099-R forms we got. This year, we rolled over $4,325 directly from my Ohio Deferred Compensation 457 retirement plan to a Vanguard Roth IRA.

Ohio 457 1099-R: Box 2a taxable amount: .00 Box 4 Fed. Income tax withheld: .00

Vanguard 1099-R: Box 2a: tax amt.$4,333.50 Box 4 Fed Inc. tax withheld: $433.35

The differences between the two forms makes it very difficult for me to figure out how to report the rollover on my taxes. Is the taxable amount zero, or $4,333.50? Has income tax been withheld already or not?

Obviously, I don't want to be double taxed if it has already been withheld, nor do I want us to be bumped up into a higher tax bracket if the taxes on this amount have already been paid by being withheld. However, I can't find any place on the 1040 to designate that the withholding taxes have already been paid, and I'm afraid that this sort of thing could easily get us audited and delay our refund.

On the Form 1040, I realize that this stuff has to be entered in the 15a &

15b area, or perhaps 16a & 16b, since it wasn't an actual IRA distribution. I'm a bit confused about which, but most confused about whether this amount should be listed as taxable or not, and whether it should be added to our taxable income for the year, if it has already had tax withheld up front.

Until I get an answer on this, I can't proceed any further in doing my U.S. or state tax forms. I've done research online for several hours this morning, but can't find anything that specifically addresses this issue. I'm stuck - help please!

Rich Carreiro · Accepted Answer

No, you didn't do that, because it's only starting in 2008 that you can directly roll/convert from a qualified plan to a Roth IRA. What you actually did was roll from your 457 to a trad IRA, and then convert that trad IRA to a Roth IRA.

So OH gives you a 1099-R with all zeros, because a rollover from a qualified plan to a trad IRA is tax-free.

And Vanguard gives you a 1099-R with numbers, because a conversion of a trad IRA to a Roth IRA is taxable.

I bet that if you look closely at the 1099-Rs, you'll see that the OH one does NOT have the "IRA" box checked, but the Vanguard one does.

It's $4333.50 instead of $4325.00 because during the time the money sat in the temporary intermediate trad IRA, it must've earned $8.50.

As for what's taxable, if you've never made any non-deductible IRA contributions to any trad IRA account, the whole $4333.50 is taxable. If you've ever made any non-ded contributions, you'll have to fill out Form 8606 to see how much of the $4333.50 is taxable.

The taxes withheld are reported on the taxes withheld line of Form 1040 -- same line where federal income tax withheld on your W-2 goes.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Una · Answer

Yup.  The amount converted from trad IRA to Roth IRA you add to yourincome, and the amount withheld you add to your other withheld taxes.Both amounts are shown here:	Una

Tom Russ · Answer

I suppose that there is also the question of what the source of funds was for the Federal Income Tax withholding. If amount withheld was money that originally came from the IRA and thus didn't end up in the Roth IRA, does that make it a premature distribution subject to the

10% penalty?

OhioGuy · Answer

Thanks folks! That's simplicity itself after having it explained to me. This was very helpful - I didn't have to call Vanguard and wait on hold who knows how long to 'hopefully' get a useful answer.

I was hoping, of course, that this wouldn't be counted as "income", since we never got a check, and it just went from one retirement account to another. However, it appears to bump us up a bit, artificially making our income look higher. On the other hand, though, income tax was withheld, so that part counts as tax already paid. In the end, hopefully both of these balance out. Thanks again!

How are 457 to Roth IRA rollover taxes handled?

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