IRA Distribution Taxes
We have a client that was credited some dividends on an IRA that he transferred to us. They then sent the check to the client for the remainder, and we deposited it within the 60 day timeframe to his new IRA.
We’ve now found out that they withheld taxes on it. How is this handled at the end of the year for taxes? This should’ve been a transfer within the 60 day period.
Permalink Submitted by Alan - IRA critic on Wed, 2016-08-10 18:12
Depending on how the IRA was first moved to you, there were better ways for the old custodian to handle this rather than making a distribution with taxes withheld. Among other things, under the one rollover limitation the client may not have been eligible to make another rollover if a rollover had been done in the prior 12 months from any of his accounts. If client is OK on the one rollover limit, then all he has to do is provide another check in the amount that was withheld in order for the full amount of the dividends to be rolled over. Even then he cannot do another 60 day rollover for the NEXT 12 months. As to tax filing, he just reports the distribution and rollover on line 15a and 15b of Form 1040 and enters the withheld amount on p 2 of the 1040. He will then get credit for the amount withheld that will make up for his replacing the withholding to complete the rollover.
Permalink Submitted by Andrew Rogers on Wed, 2016-08-10 18:47
So the old plan would be able to tell us if he was eligible or not? He rolled over the funds a week or so before the distribtion of dividends had come. It was maybe a week beforehand.What happens in a case where he is not okay with the one rollover rule?We also find it very odd that the previous custodian wrothe the check out to us as the custodian FBO of him and still took taxes out. it’s like they did a rollover but then took taxes even though it was a rollover.
Permalink Submitted by Alan - IRA critic on Wed, 2016-08-10 19:05
Yes, withholding is inconsistent with a direct transfer, so they really screwed this up. If the check was made out to you (custodian) FBO his IRA, that would ordinarily be a direct non reportable transfer and would not count against the one rollover limitation. However, due to the withholding taken out, they will need to report this on a 1099R, in other words as a distribution. This also sets up a possible mismatch if they issue a 1099R and you do not issue a 5498. Since there is no 1099R issued yet, would be preferable if they would issue a similar transfer check for the withholding amount and then NOT issue a 1099R if you can get to them before they transmit the withholding to the IRS under the client’s SSN. Was the original IRA account moved to you by non reportable transfer or by distribution and rollover?