Roth IRA transfer / indirect rollover

Submitted by Steve Benson on Sun, 2022-02-06 17:53

Hello,

Two of my Roth IRA CDs at my bank matured in 2021. When I told the bank not to renew either CD because I was going to transfer the proceeds to Vanguard, I believe they moved the proceeds from both Roth IRA CDs into my taxable checking account. Then they issued a check for the combined proceeds amount–payable to “Vanguard FBO [my name]” with “Roth IRA brokerage account [my Vanguard Roth IRA account number]” in the memo section of the check, and I deposited this check in my Vanguard Roth IRA a week later via their mobile app.

I just received an “IRA fair market value report” from the bank that shows the FBO check amount in Box 12 “2021 Transfer Distributions (Nonreportable)”. I also just received a Form 1099-R from the bank, showing an amount that is strangely 30 cents less than the FBO check amount in Boxes 1 and 2a. Box 2b is checked. Box 7 has code “7”–which is wrong because I am younger than age 59.5. All other boxes are blank. When I input this 1099-R into my tax software, it shows the amount as taxable and that I owe more taxes.

I thought this was a (nonreportable) transfer via an FBO check, but it appears the bank treated this as a distribution for an indirect rollover–maybe because they moved the proceeds into my taxable checking account before cutting the check? If they refuse to rescind the 1099-R (i.e., treat this as a transfer), then I will ask them to issue another 1099-R with the correct values in Boxes 1, 2a, and 7. What values should the “correct” 1099-R have?

I don’t know if Vanguard will issue a Form 5498 for the check deposit, but the transaction in my Roth IRA transaction history shows a “Rollover (incoming)” transaction type and “Rollover Contribution” transaction description.

Thanks for any thoughts or advice!



Submitted by David Mertz on Sun, 2022-02-06 18:24

If they deposited the funds into your checking account, this put the funds under your direct control resulting in a reportable distribution to you and a rollover to Vanguard, not a non-reportable trustee-to-trustee transfer.  Only if they paid the cash from the CDs directly payable to Vanguard FBO your Roth IRA without going through your checking account would this constitute a trustee-to-trustee transfer.
Banks are notorious for having local branch employees that are ignorant of the distinction between a trustee-to-trustee transfer and a distribution and rollover.  Many use forms provided by Ascensus that have checkboxes to indicate which of these transactions is to be performed, but the minds of these employees seem to be programmed to treat any movement of funds from an IRA as a “distribution,” so very often they mistakenly mark the one of the Distribution boxes (Normal or Early) instead of the Transfer box even though a trustee-to-trustee transfer was requested.  In your case if this or a similar form was used, they apparently marked the Normal Distribution box, causing the generation of the code-7 Form 1099-R.
Examine your checking account statement to see if the funds actually did temporarily end up in the checking account.  If they did, they should correct the Form 1099-R to have code J instead of code 7 and you would need to report this on your tax return as a distribution and rollover.  If the funds did not pass through your checking account, they need to issue a corrected code-7 Form 1099-R with zeros in boxes 1 and 2a to show that there was no distribution.
It appears that your statement from Vanguard has treated this as a distribution and rollover.  As such, you should see it reported on a Form 5498 for this Vanguard account.  They have until May to issue the Form 5498.  If this instead qualified as a trustee-to-trustee transfer and the bank will be issuing a corrected Form 1099-R showing that there was no distribution, you need to inform Vanguard so that they can correct their records so that they do not issue a Form 5498 reporting receipt of a rollover.
Given that only one Form 1099-R was issued by the bank, it appears that they treated these two CDs as investments in a single IRA account, so there should be no problem with the one-rollover-per-12-months limitation (unless you did another distribution and rollover in the 365 days ending on the date of the distribution of these CDs).  If these CDs were considered to be distributed from separate IRA accounts, only one would have been eligible for rollover.  (There is no limit on trustee-to-trustee transfers.)

Submitted by Alan - IRA critic on Sun, 2022-02-06 18:53

It appears that since your checking account is a personal account and not part of your Roth IRA, that VG treated the contribution as a rollover, and will therefore issue a 5498 in May. The extra .30 may be bank interest which would not be eligible for a 60 day rollover, but the real problem is that the 1099R issued by the bank (that does not appear to know your age) will require you to report this as a distribution and rollover. 
What would really be a critical problem is that you do not have a rollover available because you rolled over an earlier contribution taken up to 12 months prior to this distribution to your checking account. Similarly, bank CD IRAs usually are separate accounts that would generate a 1099R for each CD, requiring two rollovers for which you would not be eligible. It is very fortunate if both of these CDs were held in the same Roth IRA at the bank and only one 1099R would then be issued. Does the 1099R equal the value of both CDs including the final interest posting?
Most banks automatically renew CDs if they do not get other instructions within 10 or so days after maturity, so they must have received some instruction. Why did they transfer the funds to your checking, which is a reportable distribution?

Submitted by Steve Benson on Sun, 2022-02-06 20:42

Thanks DMx and Alan-iracritic for the responses!
According my checking account transaction history, the bank deposited the proceeds and interest from both Roth IRA CDs (as one lump sum) and then withdrew that lump sum on the same day to cut the FBO check. I don’t know why the money went through my taxable checking account. Maybe it’s because I don’t have a Roth IRA checking account and the bank didn’t ask me about opening one since I wouldn’t be using it afterwards?
I changed the 1099-R Box 7 value from “7” to “1” in my tax software, but it still marks the amount as taxable. If I change Box 7 from “7” to “J”, then the amount is not marked as taxable. Should the bank change Box 7 to “J”?
I don’t think Vanguard could know (but I may be wrong?) that the money passed through my taxable checking account, so I would think they would assume the FBO check was intended for a nonreportable transfer. The transaction was recorded as a “rollover contribution” by Vanguard, but I don’t know if they have a designation for “nonreportable transfer” or if they treat all FBO checks as “rollover contributions”. I’ll check with Vanguard about the 5498 since I need to know now in order to coordinate with the bank.
This is the only distribution and rollover I’ve ever done, so I should be okay with the one rollover per 12 months limit. The proceeds and interest from both matured Roth IRA CDs appear in the one 1099-R, although the amount in Boxes 1 and 2a are short around 30 cents compared to amount of the FBO check. I’ll ask the bank why the 1099-R is short around 30 cents.
So it appears the bank did a “normal” distribution, and Vanguard may be treating the FBO check as a rollover (not a transfer). If I can’t convince the bank to unwind the deposit into my taxable checking account after-the-fact somehow (so that it ends up being an unreportable transfer), then I should ask the bank to issue a corrected 1099-R (for an early distribution from a Roth IRA and to include the missing 30 cents) and make sure Vanguard issues a 5498 for an (indirect) rollover. Does that sound correct? Thanks!

Submitted by Alan - IRA critic on Sun, 2022-02-06 22:16

Because this was an early Roth IRA distribution, the correct distribution code is “J”, and the IRA/SEP/SIMPLE box should not be checked. There could be several conflicts created with this flawed 1099R, among them the IRS might think you did a taxable conversion because the 1099R is apparently issued as a TIRA distribution. Therefore, despite the risk that revisiting the 1099R the bank issued might result in TWO 1099R forms such that only one rollover would be permitted, not getting the 1099R corrected might result in the IRS thinking that you converted a TIRA distribution.  SInce tax entries are rounded to the nearest dollar, does the .30 result in a different rounded distribution than the currently issued 1099R?  If not, I would just ignore the .30 issue. Giving the bank too many issues to correct increases the chance that they screw it up worse.

Submitted by Steve Benson on Mon, 2022-02-07 00:15

Thanks for the reply, Alan-iracritic! I will have to get a corrected 1099-R with at least a corrected Box 7 code. When rounding, the value on the 1099-R will round down and the value on the 5498 will round up, so there will be a $1 difference.

Submitted by David Mertz on Mon, 2022-02-07 00:36

I should have said that the correct code is J, not 1.  I got thrown off by the code 7 suggsting that the original account was not a Roth IRA.  You’ll want to confirm that the bank really did have this account identified as a Roth IRA and not a traditional IRA.

Submitted by Alan - IRA critic on Mon, 2022-02-07 01:23

With respect to the rounded 5498 figure being $1 more than the 1099R, I wouldn’t worry about that since there are already certain situations where the 5498 will differ from the 1099R such as the rollover of an in kind distribution (eg stock shares) that gain in value before being returned to an IRA. The IRS is not likely to question a difference as small as $1. 

Submitted by Steve Benson on Mon, 2022-02-07 02:11

Thanks for the advice, DMx and Alan-iracritic! It looks like we all agree that 1099-R Box 7 should be “J”, so I’ll make sure the bank makes that correction. I’ll ask the bank about the 30 cents too, just to satisfy my curiosity. I have more Roth IRA CDs at this bank that won’t mature anytime soon, but I want “prepare” for possible issues in advance…

Submitted by Steve Benson on Thu, 2022-05-19 06:53

The bank told me to ignore that Form 1099-R and said they will not send it–or any Form 1099-R–to the IRS. However, my Form 5498 from Vanguard shows the amount of the check in box 2 (rollover contribution). I also just found out that a friend transferred Roth IRA money to his Fidelity Roth IRA via an FBO check last year, and he too received a Form 5498 that shows a rollover contribution. I don’t know if it is just coincidence, or if Vanguard and Fidelity treat Roth IRA FBO checks as rollovers instead of transfers…

Submitted by Alan - IRA critic on Thu, 2022-05-19 16:59

I would not place much credibility in anything the bank reps tell you. The IRS copy of the 1099R must be sent electronically, so my guess it was long since transmitted to the IRS. But you also have a companion problem with VG since they apparently issued a 2021 5498 showing receipt of a rollover contribution. If you have a rollover available, suggest you just report the distribution and rollover on your return or amended return and be sure not to take another distribution you plan to roll over for 12 months after the distribution that triggered the 1099R. Since both custodians seem to agree that this is a distribution and rollover, I wonder if your description of an “FBO check” does not conform with IRA non reportable transfer guidelines. Did you keep a copy of the check?

Submitted by Steve Benson on Thu, 2022-05-19 18:39

Hi Alan-iracritic, I received a letter from one of the bank directors in March, saying the IRA distibution was not a reportable tax transaction, that this transaction was not (and will not be) reported to the IRS, and to disregard that 1099-R. I filed for an extension, so I have not yet filed my federal or state tax returns. I checked my IRS transcripts online to see if they sent the 1099-R, but there is nothing on that transcript yet. I still have my FBO check because I used the Vanguard Mobile App to deposit it. It is payable to “Vanguard FBO [my name]” and has “Roth IRA Brokerage Account [my Vanguard Roth IRA account number]” in the memo field. I have a rollover available, but I don’t have a valid 1099-R from the bank (as far as I know).

Submitted by Alan - IRA critic on Thu, 2022-05-19 19:38

Maybe the bank transmitted a 1099R to the IRS and maybe not. Problem is that both ends of the transaction must conform, so when VG issues a 5498 and there is no 1099R it looks to the IRS that you may have deposited money from your savings account and told VG it was a rollover. To the IRS that is an excess contribution. What is the issuing bank on the check? Does it show that the check is drawn from your Roth IRA? You are probably tired of trying to get the forms from these two custodians to coordinate, but soon you will want to file your return and will have to decide whether to report the transaction as a rollover, using up your one rollover, or treat it as a transfer and not report it. Either way, be sure to save the check and other account documentation such as your bank Roth statement showing the distribution because it can take several years for the IRS to look into this type of non conforming transfer.

Submitted by Steve Benson on Thu, 2022-05-19 20:20

The bank that issued the FBO check is a small local bank, and the only Roth IRA statements I ever receive from them is an end-of-year fair market value report. The one for 2021 shows a nonreportable transfer distribution that matches the FBO check amount, and the 2021 fair market value of my Roth IRA account appears correct (i.e., the check amount was deducted). I see Forms 5498 from my bank in my IRS transcripts for past years, so the bank sends Forms 5498 to the IRS but not to me. Is that sufficient to prove that this Roth IRA money left my bank, at which point Vanguard “rolled” it in? I’ll probably try one more time with Vanguard since I thought rollovers typically applied to money movements between employer plans and IRAs / Roth IRAs, while transfers typically applied to money movements between IRAs (or between Roth IRAs). But since this also happened to my friend (unlike my convoluted situation, his was a more straightforward Roth IRA transfer to his Fidelity Roth IRA via an FBO check, and he also got a Form 5498 showing a rollover contribution), I don’t know what to think anymore.

Submitted by Alan - IRA critic on Thu, 2022-05-19 20:37

Yes, if you preserve copies of the documentation you already have available, that should be sufficient to satisfy any IRS inquiry. The IRS tends to key on 1099R forms, so if you decide to treat this as a non reportable transfer and the IRS did not receive any 1099R from the bank, you will probably never hear from the IRS due to the 5498. And if you decide that using up the one rollover is no big deal because most of the 12 month waiting period may have already passed, then you may need to dummy up your own 1099R if you are using Ttax or similar tax program to file. In that case, you would report a non taxable rollover, and the 5498 on file from VG would conform to that reporting. Your choice, but I would not waste any more time contacting these custodians. 

Submitted by Steve Benson on Fri, 2022-05-20 00:47

Thanks for all the info and advice, Alan-iracritic!

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