Individual 401K advice

[WithAPurpose]

I am hoping that the community has someone that can help me connect the dots on our individual 401k tax filing.



Situation: DH has a solo 401k for his profitable side-business (an LLC), there are traditional and roth accounts. He has transferred money from an old workplace 401k into this plan, traditional money only. Then, in 2020, he has converted the balance in the traditional account to the Roth account. The custodian (ETrade) produced a 1099-R that indicated the distribution amount as expected, but the taxable amount was 0, the “taxable amount not determined“ box was not checked, and the code was G (direct rollover to a qualified plan.) Now, there was no already-taxed money in the traditional account so I expected the entire amount to be in the taxable amount.
The call to ETrade was disappointing but not unexpected. The form will not be changed. “This is the way we handle Individual 401k because they are so flexible. We let you, the plan administrator, make decisions and document them.” Obviously, I know that this is taxable and I have paid the estimated taxes on this conversion, but the ETrade 1099-R doesn’t indicate a taxable event. Input the form differently than received or find a different way to communicate the taxable event to the IRS with my 2020 taxes?
The call with ETrade made me think more about setting up this plan. I must have made some incorrect assumptions about the administration (gross understatement) but I’m ready to clean up my mess.


So, are there any individual 401k plan-administrator’s on this board that can offer their experience so that I can have some confidence in communicating the correct information to the IRS, and getting back on the right path?


Thanks in advance,

 

[Ready]

Interesting situation. I’m experiencing a similar situation but in reverse, where Fidelity sent me a 1099 indicating I took a distribution that I never took based on an attempt by a former employer to correct a plan error by reclassifying my income as taxable four years after I earned it.

I spoke to a CPA about this and he told me the best solution is to get the plan administrator to correct the 1099 error. It sounds like you’ve tried this already and hit a dead end. The next step I was advised to take is to file the return along with a letter explaining why your return does not match the 1099. It will likely flag an audit but because you are doing the correct filing you should be able to explain the situation and put it to rest quickly.

 

[cathy63]

I just ran a quick test and TurboTax will handle this correctly if you check the "taxable amount not determined" box and answer the question about whether it is a rollover from a traditional 401k to a Roth 401k as Yes. Code G doesn't have any effect on the calculation.

Changing the checkbox shouldn't bother the IRS, but if they do send you a letter saying you overpaid your taxes, you can always straighten it out then by telling them that the custodian really should not have determined that the taxable amount was $0.

 

[gauss]

If I were in your shoes, I would look to the e-trade plan documents that you signed when you opened up the original individual 401k. In particular, I would want to see in writing if the plan explicitly allow for Roth conversions or not? If not, then that could explain their tax reporting system.

I am not an expert in this, but it would seem that if you are performing transactions outside of that authorized by the official plan documents, then there could be a larger can of worms at play here (ie the whole plan potentially being disqualified).

-gauss