Documenting IRA rollover

Submitted by Emilie Wiesner on Thu, 2023-04-06 18:44

I am helping my father navigate his taxes the year after my mother has died. My mother had two IRA’s–a traditional and a Roth–that were rolled over to his IRA accounts.

His tax preparer initially mishandled the rollovers, treating them as taxable distributions. We’ve talked with his financial institution and are confident this is not correct, but I am trying (and failing!) to sort out how the tax preparer should be handling this going forward.

We have my father’s account statements documenting that the funds were deposited in his accounts, but it’s unclear to me how to handle this on the actual tax forms. From my internet reading and talking informally with some CPA’s (through my sister, so I don’t have direct access to them), my understanding is that the rollover needs to be reported but is not taxable. However, I’m not sure how this should appear on the tax forms themselves. That is, how does one report the rollover amounts and document that they are not taxable?



Submitted by Alan - IRA critic on Thu, 2023-04-06 19:11

Sounds like these were done via 60 day rollovers generating 1099R forms, instead of using recommended non reportable direct transfers from the inherited IRAs. That may have resulted in a problem more serious than just reporting the rollovers, which is exceeding the one allowed 60 day rollover in a 12 month period. Otherwise, his return would simply report a distribution and rollover on lines 4a and 4b of Form 1040. DId he get a 1099R for both the inherited TIRA and inherited Roth accounts? 



Submitted by Emilie Wiesner on Thu, 2023-04-06 19:36

Yes, he got a 1099 for both IRA’s.  For the traditional IRA, it was coded 4; for the Roth, it was coded Q. On both, “taxable income not determined” was checked.  My sister, who worked with the financial institution (with my father) to do the rollovers, thought it was a direct rollover.Are you saying that if it was a direct rollover, we should not have gotten a 1099 at all?



Submitted by Alan - IRA critic on Thu, 2023-04-06 20:54

  • Yes, that is correct except that the correct term is a direct transfer. A direct transfer does not generate a 1099R nor a corresponding 5498 from the receiving custodian, and is not considered a rollover. 
  • The rollover contribution that was done first is the allowed rollover, the other is not allowed and would be taxable if the second one was the traditional IRA. This is unfortunate, and the custodian (if the same for both accounts) should have warned your sister about this well known limit.
  • The correction would be that the second would should not be reported as a rollover, and the contribution of that second one treated as an excess regular contribution to the applicable IRA and removed as adjusted for gain or loss.
  • There might also be RMD issues to contend with since these were distributions. Was Mom subject to RMDs, and if so had she completed her RMD for the traditional IRA for the year of death?  If not, a portion of the traditional contribution would be considered as the RMD.
  • Can be more specific with additional info such as dates and amounts and if Mom was subject to RMDs. 


Submitted by Emilie Wiesner on Thu, 2023-04-06 23:16

I’m confused about transfer vs. rollover. This IRS site mentions transfers, direct rollovers, and 60-day rollovers. It seems you are saying that there should be no 1099 for a direct transfer.  But does the same apply to a direct rollover?  Is it possible that my father had a direct rollover rather than a direct transfer? Regarding the RMD: My mother died at the very end of 2021. My understanding is that the IRA was transferred early in 2022 and the RMD was issued entirely from my father’s IRA, to him.



Submitted by Alan - IRA critic on Thu, 2023-04-06 23:41

  • Direct rollovers can occur between qualified plans and IRAs, in either direction. The 1099R for a direct rollover is coded either G or H. Direct rollovers do not occur between IRAs. The only non reported transfers are between like kind IRAs and between some 403b plans. 
  • With respect to the RMD, if mother had not completed it in 2021, father should have completed it. But was that a different distribution from the one that was rolled over?


Submitted by Emilie Wiesner on Fri, 2023-04-07 00:41

I was able to pull up the account records for my father’s IRAs. In those records, it lists a transfer/adjustment from my mother’s accounts into my father’s accounts. (From my naive reading, it seems that it was a direct transfer; so I don’t really understand why we got the 1099.) I did check that the transfer for the traditional IRA happened the day before the transfer for the Roth IRA. In this case, it sounds like you are saying that the traditional IRA would be the acceptable rollover and would then be not taxable income.



Submitted by Alan - IRA critic on Fri, 2023-04-07 03:26

  • While unlikely, there have been cases where a custodian improperly issues a 1099R to report a transfer. Is the custodian the same for mother’s IRAs (both of them) and father’s?  Another key to a distribution vs a transfer is that a distribution involves a check made out to the taxpayer, that the taxpayer either endorses over to the new custodian or deposits it and writes their own check. In other words, the taxpayer actually receives the funds. If the 1099R is wrong, he should insist that it be voided due to the one rollover limit.
  • But if there was a distribution and the traditional was deposited first, that distribution would be the valid rollover, except for any portion that was an RMD, meaning mother’s remaining 2021 RMD. The Roth distribution would be the disallowed one, but that one is non taxable. However, the Roth rollover would then be an excess contribution to his Roth IRA that would have to be removed as an excess contribution. The deadline to do that is 10/15 if his 2022 return is either filed by 4/18 or an extension is filed. Hopefully, the traditional balance was the larger one.
  • The receiving IRA custodian will issue a Form 5498 by the end of May to report 2022 rollover contributions. A 1099R therefore matches up with a 5498 for a distribution and rollover. Every so often one of those forms is not issued, creating a mismatch and potential alert for the IRS. 

 



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