Direct Rollover vs Trustee to Trustee Transfer
The taxpayer received two Forms 1099-R for two annuity investments in a SEP/IRA with the total amount and taxable amounts for the total amount of the distributions with Box 7 coded 7 and the IRA box checked. The transfer of funds was initiated and transferred by and to the new IRA Custodian of a previously opened IRA account. The checks were made out to and mailed to the new IRA Custodian noting the name of the bank with the transferee IRA account number FBO taxpayer name. The notation “Individual Retirement Account” was not on the payee line but was on the withdrawal instructions. It appears the payee was truncated. Nothing was sent to the taxpayer at the time.
What is the difference between a direct rollover and a trustee-to-trustee transfer? It appears that the direct rollover is for qualified plans and has to be reported and the trustee-to-trustee transfer is for IRA’s (including SEP/IRA’s) and does not have to be reported. Is this correct?
The new IRA custodian treated this as a trustee-to-trustee transfer on their From 5498 and has reported nothing. The old SEP/IRA custodian treated these as normal distributions. The IRS is treating it as a taxable distribution subject to the twelve months rule for rollovers.
Any information or cites would be appreciated.
Permalink Submitted by Alan - IRA critic on Fri, 2021-09-10 20:31
Movement of funds between IRAs are never direct rollovers, they are either TtoT transfers (non reportable) or distributions from which a 60 day rollover could be done. The first custodian erred in reporting this distribution on a 1099R when they clearly intended to initiate a transfer, but failed to complete the payee correctly. You are correct that this could be costly due to the one rollover limit per 12 months. EIther the taxpayer has a rollover available and will be locked out from doing another for 12 months from this distribution, or does not have a rollover available and will be subject to tax and penalty. I assume the issuing custodian is small (a small local bank?), as large custodians rarely mess up this kind of transaction.
The solution depends on whether the taxpayer had a rollover available at the time of this distribution or did another rollover within a year after that distribution. If not, and if taxpayer is aware of the situation, the 60 day rollover could be reported with no damage. Otherwise, taxpayer needs to insist that the custodian rescind that 1099R.
The receiving custodian was correct not to issue a 5498, however the lack of a 5498 will make the IRS think that the distribution on the 1099R was not rolled over, so could result in the taxpayer having to document the rollover from a statement of the new custodian showing receipt of the transfer.