Simple IRA Rollover Within 2 Years
I have a client who unknowingly did a Simple IRA rollover into a self directed account within two years of the first contribution. She received a check made payable to her with no withholding, which she then deposited in full into a new IRA rollover account at Schwab. Her 1099R from Vanguard shows an code 01 (early distribution) in Box 7. It seems she might have two issues here:
1.) A withdrawal/transfer within two years of the first contrbution
2.) An unintentional distribution resulting in income tax on the full amount of the IRA
Needless to say, she is very upset about potentially having to pay ~$40K in taxes. Won’t Schwab report an IRA rollover/transfer in an offsetting amount? How will the IRS know that the Simple IRA was rolled over within the two year waiting period? Anything she can do to correct/ameliorate the situation at this point?
Thanks,
Richard
Permalink Submitted by Alan Spross on Tue, 2012-03-06 18:03
Are you sure the code is 1? The correct code in Box 7 for a SIMPLE IRA distribution within the first two years is “S”. The S code is the IRS notification of failure to meet the 2 year requirement.
So either she met the 2 year requirement and does not know it OR Vanguard messed up and she is very lucky.
Permalink Submitted by [email protected] on Tue, 2012-03-06 21:09
Yes, the code in Box 7 is 01. So while this takes care of the 2 year requirement, shouldn’t the distribution be coded as G and not 01? Again, there was not withholding. Based on the 1099, how will the IRS know that this was in fact a rollover and not a distribution? And how should she handle it in terms of her tax return?
Permalink Submitted by Alan Spross on Tue, 2012-03-06 22:15
It was a distribution, but was rolled over. Code G is only used for direct rollovers when an IRA is only on one end of the transfer (eg 401k to IRA or IRA to 403b). For a SIMPLE IRA rollover, the only code is S if the two year waiting period has not been satisfied. Since the rollover was not done directly, the code would either be 1, S, or 7. If a direct transfer was made from the SIMPLE to a TIRA, the code would be S if the two year period was not met, and if it was met the transfer would not be reported on a 1099R at all.
Code 1 means a distribution and the client reports the rollover on line 15 of Form 1040. The coding on this 1099R indicates (possibly incorrectly) that the two year period WAS met and the Code 1 indicates that a rollover is possible (again possibly incorrectly). If she chooses to report the rollover on line 15b, all she needs to do is hope that a revised 1099R does not come in the mail with the dreaded S code.
Possibly, the SIMPLE IRA custodian does not handle very many of these and is not even aware of the S coding.
Permalink Submitted by Peter Lingane on Wed, 2012-03-07 02:35
I once submitted paperwork to rollover funds from a SIMPLE IRA prematurely. Fidelity’s back office staff refused to process the request until I had confirmed that I wanted to do something that was probably stupid. I was embarrassed, and grateful.