1099-R on Roth IRA annuity payment

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  • #14462
    wanttoknow
    Participant

    I have been receiving monthly payments from a Roth IRA annuity I have with TIAA, and, as usual, have received a 1099-R covering all regular 2020 payments with the code “Q” in box 7 of the 1099-R, indicating that the payments are qualified distributions, and thus tax-free.

    In November TIAA notified me that due to a calculation error it had been underpaying on my annuity, and it paid me $1,476.99 to make up for the past underpayment plus $124.59 in “estimated earnings” on the underpayment, for a total of $1,601.58.

    Now I have received a second 1099-R showing that the entire $1,601.58 is coded “7”, which will make it taxable. Am I right in thinking that $1,476.99 of this should be coded “Q” ?

    If so, if I can’t get TIAA to correct the 1099-R, what should I do?

    #14463
    Jannie
    Participant

    I don’t have a “for sure” answer, but logic would say it should be Q as the rest was. My comment is a “been there” advice watch TIAA like a hawk. There attention to detail seems to be lacking. I have had trouble initially with a RMD – Most recently not rec’d forms they would be sending & no computer acknowledgement that they were sending and it’s been over a wk. Most time the acknowledgment comes the same day. So always check up on what they do.

    #14464
    wanttoknow
    Participant

    Thanks, Jannie. I’ve had problems with TIAA in the past, so I tend to be vigilant. But this seems beyond the pale.

    #14479
    Alan S.
    Participant

    Yes, it should be Q, even if the distribution included RMD shortfalls for some prior years before they decided to code Q in the first place.

    I think the coder mistook this for a TIRA account. What is in Box 2a, and for the other part of Box 7 (IRA Type), no box should be checked for a Roth IRA. Checking the IRA box would confirm they mistook the IRA type. Try to get them to issue a corrected 1099R, but they may issue one combined 1099R that would replace both of the 1099R forms you have now.

    If they refuse, the IRS may bill you for tax due because of this incorrect 1099R. If you want to preempt that you could file your own substitute 1099R with Form 4852.
    https://www.irs.gov/pub/irs-pdf/f4852.pdf

    #14490
    wanttoknow
    Participant

    Thanks, Alan.

    The normal payments are not RMDs; they’re lifetime annuity payments. And all normal annuity payments from the beginning have been coded “Q”.

    Box 2a taxable amount = $1,601.58. IRA type is not checked. So it’s contradictory.

    An additional complication is that they withheld $160.16, even though I had previously set my account at no tax withholding.

    I have just talked to TIAA about this, and they refuse to change the 1099-R or to refund the incorrect withholding. The explanation the phone rep gave me was essentially a lot of words communicating no reason for their stance, except that “this was a separate payment separate from annuity payments”.

    At my request the phone rep’s manager is supposed to call me later this week.

    #14501
    Alan S.
    Participant

    I mentioned RMDs since I thought that you had a non spouse inherited Roth IRA, so this one must be one that you own?

    While they cannot refund withholding, you will recover that when you file if you send a corrected 1099R to the IRS. What they said makes no sense, but if you surrendered the principal for a lifetime annuity flow this distribution is an unexpected benefit if they continue your annuity payments as is, but if they underpaid you to date, that would suggest that your future distributions should also increase somewhat to reflect correction of the prior error going forward.

    As for your tax filing, the Form 4852 Inst indicate that you should call the IRS and the IRS will send you the 4852 to complete. I hope the IRS is answering their phone these days, because things are a mess there. Of course, you will probably want to wait a time to see if TIIA gets back to you. If they have a logical explanation, I would appreciate your posting it back here. If they do not provide an explanation, I hope you contact the IRS, because TIIA deserves to be contacted by the IRS for their error.

    I think the withholding complicates things, and you will get credit for that, so it will be simpler to concentrate on the Box 2a taxable amount and the Box 7 code and forget the withholding since that will take care of itself.

    It is possible that pursuing this properly will take enough time so that you will have to file an extension by 4/15. I do not know what would happen if you just went ahead, downloaded the 4852, and filed without waiting for the IRS.

    #14502
    wanttoknow
    Participant

    Yes, I own the Roth IRA annuity. The non-spousal inherited IRA is a traditional IRA.

    The annuity is variable, and the payment varies from month-to-month. The Nov. 2020 letter about the calculation error just gave the amount of the total underpayment (covering all months of underpayment) and showed what the Oct. 1 2020 payment would have been without the calculation error. There were no further details. From the Oct. 1 underpayment I have figured out that the annuity was underpaid over about 30 months.

    The November letter said “Please be aware that the amount will be taxed as income . . .” I should have questioned that back then.

    Yes, I agree the withholding is a minor issue.

    Although line 4 of Form 4852 says “I have notified the IRS of this fact”, the instructions just say “ . . . you may call the IRS . . . for assistance.” I’ll give them a call, and if it turns out to be an impossible wait, I’ll just note on the Form 4852 that I tried to reach them.

    I also posted this issue to a TIAA discussion group on community.morningstar.com.

    #14524
    wanttoknow
    Participant

    I have a little bit more to report on this. I made another call to TIAA, and got a slightly more meaningful explanation, which indicates it’s not just a coding error:

    TIAA at the outset, before notifying annuitants of the calculation error and the correction, decided they would report the amount of the “remediation” as taxable. “Remediation” is the word used by the consultant I talked to. I wonder if that is significant.

    Up to now I had thought that probably the calculation error had occurred with all annuity payments, regardless of source, and that TIAA had slipped up in not tailoring the correction procedure to what is probably a very small percentage of Roth annuities.

    But apparently they did this on purpose.

    #14526
    Alan S.
    Participant

    It sounds much like any other underpayment being made up by a plan. It cannot be the return of any excess amount you contributed, so it makes no sense that it would be taxable inside a Roth IRA. Perhaps at some point they will explain their rationale.

    #14547
    wanttoknow
    Participant

    As mentioned before, I have posted about this issue to the Morningstar TIAA discussion forum. I’ve received two suggestions:

    #1: That TIAA might claim that the correction payment is taxable because it was not distributed from my Roth IRA, but that it was TIAA’s “general account” * that was paying for the correction. However, my understanding has been that once I “converted” the Roth IRA to the immediate annuity contract, the Roth IRA went out of existence. I.e. there is not some “fund” specifically for my personal annuity benefits.

    (* Actually I guess it would be a separate, rather than general, account that would be involved here, since my annuity is presently variable.)

    #2: That I could avoid taxation of the correction payment by reporting it in Part III of Form 8606. Scrutinizing the form I can see that arithmetically this might work, but I’m wondering if it’s O.K. to use it for annuity payments. Was the Roth IRA distributed when I “converted” it to the annuity contract, or do the annuity payments constitute Roth IRA distributions?

    #14637
    Alan S.
    Participant

    The annuity payments are Roth distributions and your Roth is qualified. However you file, a tax program is not going to accept a 7 coded 1099R on a Roth IRA as it is not one of the possible Roth IRA distribution codes and the 1099R Inst specifically state that Code 7 is not to be used for a Roth IRA distribution. Therefore in addition to the taxes due a filing work around will probably be required. I have not heard of any distributions on a retirement account that were made from some other source. If a calculation error was made on the annuity payments for a qualified Roth, the make up distribution remains a qualified Roth distribution. I am aware that TIIA often does things differently than other firms, but this one makes no sense.
    Is your Roth IRA account number shown on this 1099R? This usually appears in the lower left corner of the form.

    Perhaps you can get access to the people who actually code these distributions for submission to the tax Dept or whatever firm actually issues the 1099R forms. If they used Code 7 that will cause filing issues in addition to taxes on a Roth IRA, they at least should be able to provide a detailed explanation for it.

    #14704
    wanttoknow
    Participant

    This 1099-R, as well as all previous, shows the account number of the immediate annuity, which is different from that of the Roth IRA from which it sprang.

    I will try to get access to whoever produces the 1099-Rs. But TIAA’s official line is that deeming the correction payment taxable was deliberate on their part from the outset.

    What do you think of the idea of using Form 8606, Part III to offset the taxable correction payment with Roth IRA basis? That could be a back-up in case Form 4852 doesn’t work. Or is Form 8606 not supposed to be used for immediate annuities?

    If Form 8606 can be used for immediate annuities, then according to the instructions, I should have been filing it all along–but never knew I was supposed to.

    #14720
    Alan S.
    Participant

    Form 8606 can be used to report distributions from Roth annuities that are not yet qualified, but not for qualified Roths. There is no specific mention of a Roth account anywhere on this or other 1099R forms on this annuity?

    If you used an 8606, you would probably have to file a paper return or change the 7 code to a T or Q.

    Was this Roth funded by a conversion, and if so, when? Is is possible that they could have traced this error back to a TIRA that was converted, and therefore your taxable conversion may have been understated?

    #14752
    wanttoknow
    Participant

    For all 1099-R forms on this annuity, the only references to this being Roth are the immediate annuity account number and, except for the 1099-R at issue, the code Q which translates to “Qualified distribution from a Roth IRA”.

    History:
    2009-11: rollovers from 403(b) to T-IRAs.
    2009-12: conversion of T-IRAs to Roth IRAs
    2014: immediate annuity from one Roth IRA

    I guess what you are suggesting is that I might not have been taxed on the full amount of the Roth conversion because TIAA understated the amount that got converted? I can try to check into that.

    But the error wasn’t just on my account. It may have been across the board on all variable annuities, or at least all variable accounts based on a particular portfolio. Other participants in the Morningstar TIAA forum report the same error occurring in their annuities–but either their annuities were taxable, or if they were qualified the amount of the improperly taxed amount was so small it wasn’t worth disputing.

    According to a letter from TIAA, the error had something to do with under-calculating the Annuity Unit Value, which depends on market values.

    I continue to be suspicious that from the very beginning, even before getting to issuing 1099-Rs, TIAA failed to notice that some of the annuities affected were Roth. And now they are saying that at the outset they determined the Roth corrections were properly taxable.

    #14807
    wanttoknow
    Participant

    Correction of history:

    2009: rollovers from 403(b) to T-IRA

    2009-10: rollovers from 403(b) to Roth IRAs

    2009-12: conversion of T-IRA to Roth IRAs

    2014: immediate annuity from portion of 1 of 3 Roth IRAs

    2018: 3 Roth IRAs combined into 1

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