April 2024

Reporting “Deemed” Distributions With Respect to a Roth SEP-IRA

The purposes of this article is to discuss the guidance which the IRS has furnished in the instructions for forms 1099-R and 5498.

If authorized by an employer, the employer may allow a participant of the SEP plan to have her of his employer contribution designated as a Roth SEP-IRA.

A participant who makes this election will have a deemed distribution. The IRS instructions clearly state that the employer contribution must be reported for the year in which the contribution is made to the employee’s Roth SEP-IRA as if a distribution has occurred from a traditional IRA. There is a quasi-conversion. On the Form 1099-R boxes 1a and 2a are to be completed using code 2 or 7 in box 7 as applicable, and the IRA/SEP/SIMPLE box in box 7 is to be checked.

It appears that once these employer’s matching or elective deferral funds have been contributed to the participant’s Roth IRA that the standard Roth IRA distribution rules apply. That is, the ordering rules apply. Annual contributions are withdrawn first, then conversion contributions and finally earnings are distributed.

Reporting “Deemed” Distributions With Respect to a Roth SIMPLE-IRA

The purposes of this article is to discuss the guidance which the IRS has furnished in the instructions for forms 1099-R and 5498.

If authorized by an employer, the employer may allow a participant of the SIMPLE-IRA plan to have her of his employer matching contribution or the non-elective contribution designated as a Roth SIMPLE-IRA contribution.

A participant who makes this election will have a deemed distribution. The IRS instructions clearly state that the employer contribution must be reported for the year in which the contribution is made to the employee’s Roth SIMPLE-IRA as if a distribution has occurred from a traditional IRA. There is a quasi-conversion. On the Form 1099-R boxes 1 a and 2a are to be completed using code 2 or 7 in box 7 as applicable, and the IRA/SEP/SIMPLE box in box 7 is to be checked. A participant who elects to have his or her elective deferrals be designated as Roth SIMPLE-IRA contributions will have his or her Form W-2 prepared to reflect these Designated ROTH SIMPLE-IRA elective deferrals. This was discussed in the January 2024 newsletter.

It appears that once these funds have been contributed to the participant’s Roth SIMPLE-IRA that the standard Roth IRA distribution rules apply. That is, the ordering rules apply. Annual contributions are withdrawn first, then conversion contributions and finally earnings are distributed. But the special 2-year rule also applies for SIMPLE-IRAs.

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