1099-R on Roth IRA annuity payment – Chapter 2.

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  • #24572
    wanttoknow
    Participant

    Alan,

    Back in February you and I had a discussion about a TIAA 1099-R coded “7” in Box 7 for part ($1,476.99) of my 2020 annuity payments originating from a Roth IRA. (There was a separate 1099-R coded “Q” for the rest of my 2020 annuity payments.)

    The annuity payment coded “7” was the late payment, in November 2020, of underpayments that had occurred over the past five years due to a calculation error. In addition, $124.59 in estimated earnings was paid in November to make up for what would have been earned on the underpayments had they been paid on time, and that was included in the 1099-R coded “7”.

    Two calls to TIAA had failed to get the 1099-R corrected. You urged me to try to talk to someone in the TIAA tax dept. to find out the reason for the “7” code. I finally got that done yesterday. I was not given access to the tax dept., but today I received the following explanation, which was said to come from the tax dept.

    “In regard to the distribution code 7 that was issued on the remediation payment, it was an out of contract payment therefore it does not get a Q. The funds paid were part of a remediation, the reporting will not be corrected. All the distributions from the actual contract are coded correctly with a Q.”

    I know that others received the “remediation” payment on their annuities as well, but for the only one I know of whose annuity was a Roth, the amount was so small that he/she decided it wasn’t worth trying to get the 1099-R corrected.

    Based on our February discussion I was going to file Form 4852 with my 1040. In light of the above, is that still appropriate?

    Here’s a link to our February thread:

    1099-R on Roth IRA annuity payment

    #24942
    Alan S.
    Participant

    Still makes no sense, but they intentionally deemed this taxable despite clearly recognizing the underlying contract as a Roth. I cannot locate any such IRS guidance, and there is nothing to this point in the 1099R Inst. They could be right, and may have received a specific document from the IRA on this exact situation, or others like it given their massive annuity business.

    If so, your efforts to file an 8606 or 4852 may not be accepted by the IRS. The 4852 would probably be the way to go as the Q code would eliminate any taxes or 8606. There might be more to the story if this is actually an out of contract payment, and if so perhaps they should have issued a 1099 MISC instead of an R. Any action you take becomes a crap shoot since there are so many variables involved and the TIAA explanation is not really complete.

    #25037
    wanttoknow
    Participant

    Thanks so much, Alan.

    What is baffling to me is why they would choose to treat Roth annuitants in this way.

    I will probably file the 4852 with an attachment giving the whole story including TIAA’s explanation. The worst that can happen is that I will have to pay the tax anyway plus interest, and maybe penalty.

    #25252
    wanttoknow
    Participant

    Alan,

    The faulty 1099-R shows $1,601.58 in boxes 1 & 2a.

    TIAA’s letter explains that $124.59 of this is “estimated earnings” – i.e. what I would have earned on the $1,476.99 tardy distribution had I received it when I should have.

    I believe I should report the $124.59 as taxable on my 1040. But where? It isn’t really an IRA distribution or annuity payment, is it?

    In which case, on the Form 4852 I would give the $1,476.99 a distribution code of “Q”, but no code for the $124.59.

    #25410
    Alan S.
    Participant

    If I recall, the 1099R did not have the “IRA” box in line 7 checked, and show the same account # as the Q coded payments. Therefore, this distribution is still being treated as a Roth distribution other than the 7 code. I think your 4852 will make the case that this distribution also should have been coded Q. If so, it would be inconsistent to pay tax on the earnings and they should be treated like the rest of the distribution.

    These earnings are not excess amounts in any way. Underpayments to plan participants from prior years typically require earnings to be paid as well, and while I cannot locate any IRS guidance on remediation payments specifically, I don’t know why they would be treated any different than other plan underpayments to participants.

    #25496
    wanttoknow
    Participant

    Alan,

    The faulty 1099-R DOES have the same account number as the ones coded “Q”. It also does not have the IRA box checked.

    Re whether the “earnings” are taxable: I guess this has something to do with some area of the tax law with which I’m totally unfamiliar. I thought the “earnings” part of the remediation payment was to make up for what I would have earned on the underpaid amount had it been paid on time, and that WOULD have been taxable (unless invested in tax-exempt bonds).

    #25631
    Alan S.
    Participant

    Any earnings on the amount you should have been paid would also be Roth earnings. As such I don’t understand why any portion of this distribution would be taxable.

    #25978
    wanttoknow
    Participant

    Alan,

    Now I think I may understand the different ways you and I have been looking at this. You have been looking at it from inside the Roth, and I have been looking at it from outside.

    You said: “Any earnings on the amount you should have been paid would also be Roth earnings.”

    Is that because the $1,476.99 which should have been paid to me earlier was not, and thus did earn an additional amount inside the Roth?

    But TIAA’s letter initially reporting the under-calculation referred to the $124.59 as “ESTIMATED earnings”.

    That is what led me to focus on the earnings (taxable unless tax-exempt investment) on the $1,476.99 I could have received outside of the Roth had I received it in a timely way.

    The question is how the I.R.S. would view it.

    I would be happy to “sacrifice” the $124.59 (i.e. pay tax on it) if that would simplify things. I would like the I.R.S. to focus on TIAA’s coding of a Roth annuity distribution. But I can see how maybe it’s not possible to separate the two things.

    #26004
    wanttoknow
    Participant

    Alan,

    Now I think I understand better another wrinkle to this whole thing, which is that the annuity is not synonymous with the Roth.

    TIAA’s recent explanation to me says the remediation payment was not made out of the “contract”–i.e. the annuity contract. I wonder why not.

    But in any case that seems irrelevant to the coding of the 1099-R, because the remediation payment (including the $124.59 “estimated earnings”) would still seem to be a Roth distribution.

    I wonder if what happened is that if TIAA made the remediation payments from the annuity contract there was some consequence of that that was unacceptable. I believe TIAA annuities are subject to the New York State Dept. of Insurance, and I know their regulation is rigorous. The under-calculation may have affected all the TIAA annuities, in which case the $ could be a lot, since the under-calculation continued for five years. Perhaps in order to make the remediation payments they had to take all of the funds from some part of their coffers which was non-Roth, even though some portion of the annuitants have Roth annuities.

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