What to do if 1099 reports too much taxable earnings distributions?

[Anita]

I made a withdrawal from a 403b. After a discussion on another thread I believe my fund manager has over reported my taxable earnings from my distribution to the IRS (or will report at end of year). I have spoke to them but honestly...I can only speak to a call center and no one has been able to explain to me how they derived at my earnings from my contributions over the years. They keep telling me they will get back with me but never do.

Anyway...if I cannot get a satisfied answer from them...how do I figure and report the correct long term gains on a fund I have held for over 10 years for tax purposes? Is there a formula that the IRS uses?
Thanks.

 

[Miarocks]

I am no tax expert, but I’ve used 403(b) accounts for years (in my career as a public educator). It’s my understanding that they are tax-deferred investments (meaning the contributions were pre-tax), thus withdrawals and distributions are taxed at your current ordinary income rates. I don’t see where capital gains (short or long-term) would even come into play. Those apply to taxable investment accounts, like stocks or mutual funds held in a brokerage account (not tax-deferred accounts).

Also, you didn’t mention your age, but there may be additional tax considerations for withdrawals if you are younger than age 59 1/2.

I’m sure someone with more knowledge than me can speak to this, but this is how I understand these accounts to function.

 

[Ready]

I was confused by the question as well. I’m not familiar with 403b plans but I understand they are similar to 401K plans, which are tax deferred, and thus all withdrawals are considered ordinary income for tax purposes.

Perhaps the OP can elaborate on why they believe there was an error.

 

[Anita]

I'm sorry...its a Roth 403b. My bad. I forgot that important detail

But please understand. I don't want to hash over the specifics.These were covered on another topic I posted a few days ago. Basically...it was reported that I made $18k in earnings on a $15k withdrawal. That is obviously impossible.

I am simply asking what to do if I believe that my fund manager reported the wrong amount of gains to the IRS? How do I compute the gains on a specific fund held for over a long term and correct the mistake?

Thanks a bunch, guys.

 

[Ready]

Do you have records showing what you purchased the shares for? Can you provide a reconciliation showing what you believe the actual gains should be?

It’s hard to know what advice to give you here since you have provided so little information. But in general if you believe the fund manager has made a mistake you would need to contact them and state your case.

In general I would agree that it’s hard to have $18K in gains on a $15K withdrawal but it seems like this would have been obvious when you initially contacted the fund manager, so I would guess there is more to the story here.

 

[cathy63]

First of all, did this withdrawal occur in 2020 or 2021? If it's in 2021, locate your Q4 statement from 2020. The contributions and earnings should be shown there. If it's for 2020 and you think you have an incorrect 1099-R, then you need to ask your custodian for a corrected 1099-R.

If the company isn't calculating your total contributions (though I think they have to be doing that by law), then you can do it by looking back at your W-2s for all the years you've held the account. Look for the amount next to code BB in Box 12 of each W-2. Sum those up to get your total contribution. Everything else in the account is earnings.

When you get your 1099-R, it will show the distribution in box 1, taxable amount (or taxable amount not determined) in box 2a/b, tax withheld in box 4. It may also include the amount of the distribution that was a return of employee contributions in box 9b. If they have that, the custodian can calculate the taxable portion of the distribution. If they don't, then they should check the taxable amount not determined box in 2b and you will calculate the taxable part of the distribution on your tax return. The amount withheld in box 4 may be too little or too much. It's pretty rare for it to be the exact right amount. If they withheld too much, you'll get it back from the IRS as a refund when you file your return.

 

[Anita]

Im sorry..Let me get real specific with exact amounts
I asked for a total amount of $30k to be withdrawn from my Roth 403b. This is only a small portion of the entire value of the Roth 403b. I qualified for the age of 55 rule so my withdrawal was not penalized 10%. I specifically asked for the entire $30k to come from my Roth 403b Money Market account because the taxable earnings would be very, very small.
Anyway...when they sent me the check and statement, it shows the following:

Net Total Withdrawn - $16,853.59 from my Roth 403b SP500 Index fund (I didn't want any money from this fund)
$16,853.60 from my Roth 403b Money Market (I specifically told them to withdrawal all from this fund)
Total Withdrawn - $33709.19[/b
Federal Taxes Withheld - $3666.56
Taxable income - $18,332.82
Ordinary Income - $18,332.82
Non Taxable Amount - $15,374.37

First of all, I am pissed that they took money from my Index fund when I specifically told them I wanted it from my money market. But past that...what confuses me is that how can I have Sooooooo much taxable income (which is derived from my earnings only) on a $33307 distribution where half of it comes from a money market? As we all know...my Money Market earnings should be almost nothing. So, I can only assume my taxable earnings of $18,332 came form my distribution from my SP500 index fund...right? But then, how can I have $18,332 of taxable earnings when my distribution was only $16,853? That's not possible..right? Shouldn't a good portion of the $16,853 came from my contributions over the years? These should be tax free because it is a Roth account.

I have tried twice to call and ask the call center who manages the account but they don't know. They only tell me that the "processor" performs this function and I cannot speak to the "processor". They said they will inquire by email and get back with me.

Sorry to be long winded but that's all of the details.

 

[Anita]

Ok..I've spent hours downloading all reports, fund performance data, etc...

What I can come up with is this. The fund manager simply looked at the lifetime performance over ALL of my five Roth 403b funds. This came to 53% earnings of ALL of my cumulative Roth 403b accounts. Then he simply multiplied that with $33707 and arrived at $18,332 taxable income. He used a number of around $33700 so my net distribution (after the 20% tax withholding) would equal my request of $30k.

Where I erred in my expectations:
First - I asked that the entire $30k distribution be taken from my Roth 403b Money Market only. I previously asked several times before I initiated this withdrawal request and was told by their representatives that this was allowed.
Second -Even if I cannot specify which fund to pull my withdrawal from, I would have thought that my taxable income would be figured individually for each fund that the money was pulled from? That would have made a huge difference since half of the money was from a Money Market.
Third - I have another 3 Roth 403b funds that the fund manager didn't pull from for my distribution request. Only those two I previously mentioned. Why? This makes no sense.

Thanks

 

[cathy63]

Ok..I've spent hours downloading all reports, fund performance data, etc...

What I can come up with is this. The fund manager simply looked at the lifetime performance over ALL of my five Roth 403b funds. This came to 53% earnings of ALL of my cumulative Roth 403b accounts. Then he simply multiplied that with $33707 and arrived at $18,332 taxable income. He used a number of around $33700 so my net distribution (after the 20% tax withholding) would equal my request of $30k.

Where I erred in my expectations:
First - I asked that the entire $30k distribution be taken from my Roth 403b Money Market only. I previously asked several times before I initiated this withdrawal request and was told by their representatives that this was allowed.
Second -Even if I cannot specify which fund to pull my withdrawal from, I would have thought that my taxable income would be figured individually for each fund that the money was pulled from? That would have made a huge difference since half of the money was from a Money Market.
Third - I have another 3 Roth 403b funds that the fund manager didn't pull from for my distribution request. Only those two I previously mentioned. Why? This makes no sense.

Thanks

The custodian did do the math correctly. When you take a withdrawal from your 403b account, they do look at the entire account to see how much of the money is your contributions and how much is earnings. In this case, 53% of your entire account consists of earnings, so 53% of your distribution is taxable and 47% is a non-taxable return of contributions. That is absolutely the only way the tax law allows them to do it. You are thinking of this as if there are five separate investments with five separate gains and you want to pick and choose between them, but the government thinks of it as one big pot of money that has a basis and some gains and they require that every withdrawal comes proportionally from those two categories.

For purposes of tax calculation, it makes no difference at all which fund the custodian sold. Some custodians might let you specify that they should sell Fund X and use that for the distribution, but that is just a way for you to say you don't want to hold Fund X any more and save you from having to rebalance later. I have no idea why your custodian chose to sell off these specific funds, but in the end it doesn't matter. If you don't like the allocation you have today, then just login to your account and reinvest the money that's currently in the Money Market back into the S&P fund and you'll be in the same position you thought you'd be in when you started the process (except more of your withdrawal is taxable than you expected).

 

[Anita]

Thanks. And yes...I learned a hard lesson.
FYI the Roth 403b fund manager will let me pay back my funds they sent me and void the entire transaction. Then I will transfer all of my Roth 403b funds into an existing Roth IRA where I can request contributions only and specify from which fund.
Thanks