1099R for Cancelled IRA Rollover CD

Submitted by Frank Coffman on Tue, 2010-03-23 19:02

Early last year I purchased a IRA rollover CD for about $9000 at a local bank. Two days later, I realized that the money was part of my previous year’s RMD and should not have been rolled over.
(I had several CDs maturing in later December of 2008 and got them mixed up with my RMDs. The CD in question was rolled over within the allowable period.)

The bank cancelled my IRA CD and coverted it to a conventional CD.

In preparing my 2009 income taxes, I find they sent me a 1099R for the cancelled IRA CD amount.

Was this correct, and if not how do I handle this problem?

The money was part of my 2008 RMA and was taxed then. Now with a 2009 1099R it looks like I’ll be taxed again



Submitted by Anonymous (not verified) on Tue, 2010-03-23 20:33

I am a bit unclear of several things in your post:
You say that you rolled the money that “was part of my previous year’s RMD and should not have been rolled over”. Is this money that was already distributed to you, in other words non-IRA money? If yes, than you rolled over regular money so the timeframe is irrelevant. It is also not allowed.

The bank cancelled this IRA and turned it into a retail CD, correct? Well, they obviously did not and treated it as a distribution. I would clear that up with them and let them truely [u]cancel[/u] the rollover contribution and set up a regualar retail CD – problem solved.

In case the bank will not do that for you, you do have a greater problem.
(I will wait for a response to address the questions above. Maybe I am missing something).

pko

Submitted by Jose Morales on Tue, 2010-03-23 22:13

If you opened an IRA account and deposited funds as a rollover, the bank would not be allowed to simply “cancel” the IRA and pretend that it never existed or that the rollover never occurred.

What is the distribution code on the 1099R? If you discovered your mistake within 7 days they may have treated it as a revocation and used distribution code 1. However in your situation what you really had was an excess contribution, as the funds were not eligible for rollover. The transaction should have been processed as an excess contribution correction, which would have resulted in a 1099R with a distribution code of 8.

Telling us the distribution code on the 1099R will help us figure out how the bank treated the closing of the IRA CD.

Submitted by Anonymous (not verified) on Wed, 2010-03-24 00:42

I agree with you urusei2. A revocation is the best solution.
http://www.irs.gov/pub/irs-pdf/i1099r.pdf (this gives the instructions).

I have seen institutions “cancel” a rollover contribution based on some information that was overlooked through a recorded call or instructions on a check. Therefore, if the client can put some doubt on how the bank handled this, they might fix it…..

I guess we need to wait for the response.

pko

Submitted by Frank Coffman on Fri, 2010-03-26 17:56

Box 7 =Distribution Code 8

How do I report this?

Submitted by Alan Spross on Fri, 2010-03-26 19:12

What are the amounts in Boxes 1 and 2a?

Submitted by Frank Coffman on Sat, 2010-03-27 03:23

Box 1 =9839.53
box 2a =2.53

I entered the 1099R data into my tax program using 8 in Box 7 and it showed up as taxable,
which doesn’t seem right since I paid tax on this money the previous year as a RMD

Submitted by Alan Spross on Sat, 2010-03-27 04:17

Is your entry done as an IRA distribution and not an employer plan corrective distribution? Only the $3 should be taxable.

The actual amount of the excess contribution should not be taxable or appear on line 15b. And certainly not on 16b which would indicate you did not enter it as an IRA.

Submitted by Anonymous (not verified) on Sat, 2010-03-27 16:42

I find it interesting that the bank said they “cancelled” the CD. So they could have:
1. made the transaction disappear
2. revoke the rollover
3. treat it as an excess, with a seemingly high interest rate the way I calculate – 5% (not sure if there is some penalty embedded in there).

And they chose #3, which appears the worst outcome for the client.

PS: I want a short-term 5% CD, where can I get one”

pko

Submitted by Frank Coffman on Sat, 2010-03-27 20:43

Alan:
It was an IRA rollover
Box 15a =45820 rolled over some other Cds from other banks
Box 15b =10590 Including $750 RMD from fidelity that I forgot to cancel
Box 16a & b =0

Submitted by Alan Spross on Sat, 2010-03-27 22:06

If you entered only 2.53 as the taxable amount in 2a, I don’t see why the rest of this is coming out taxable. 15b is exactly 9837 too high which suggests that you entered 9840 where you should have entered 3 or 2.53 if you are not rounding.

Submitted by Frank Coffman on Sun, 2010-03-28 16:33

Alan

I think I found the problem.

The 1099-R had 2.53 entered in Box 2a and “Taxable amount not determined ” checked in Box 2b.

This was apparently throwing off the tax program

Thanks for your help

Should I go back to the bank and try to get them to revise the 1099-R?

Submitted by Alan Spross on Sun, 2010-03-28 18:31

You could try, but probably not worth the follow up if they don’t do it. Point them to the 1099R Inst, p 8. They are only to check 2b if they cannot calculate 2a as in ordinary distributions. The Instructions say ” if you check this box (2b), leave 2a blank”, therefore one or the other box should be left blank. In this case 2b should be the blank one.

Submitted by Jose Morales on Tue, 2010-03-30 16:08

[quote=”[email protected]“]I find it interesting that the bank said they “cancelled” the CD. So they could have:
1. made the transaction disappear
2. revoke the rollover
3. treat it as an excess, with a seemingly high interest rate the way I calculate – 5% (not sure if there is some penalty embedded in there).

And they chose #3, which appears the worst outcome for the client.

PS: I want a short-term 5% CD, where can I get one”

pko[/quote]

Option 1 is not proper. No IRA transaction should ever simply be made to disappear. The IRS has processes in place to correct any “mistakes” and how they are to be reported.

Option 2 is only available within the first 7 calendar days after the account/plan is opened.

Option 3 may seem complicated from a reporting standpoint but it would be the only correct option if Option 2 wasn’t available. The only downside to Option 3 is having to use the IRS equation for calculating the earnings attributable to the excess contribution. Both the old and new method usually result in a value greater than you would have with a more realistic simple interest calculation.

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