Changing IRA Roll-over

Submitted by Karol Quiring on Mon, 2017-02-13 19:27

My client transferred her entire IRA to a different trustee in 2016 and received a 1099R Coded 7 ( Normal Distribution) I have documentation that the funds were received by the new trustee in a timely manner. Unfortunately, she did not take her RMD during the year. She will soon be taking a distribution of the 2016 RMD so that she does not have an excess contribution. It appears now that she could take much more than the RMD and still pay no tax for the year 2016. Can we arbitrarily choose to pay tax on a portion of the amount that was rolled over and then consider it basis for the future?



Submitted by Jodi Stevens on Mon, 2017-02-13 21:09

We have a client that made an IRA contribution for 2015.  Based on advisors notes their income was to high to go directly into Roth IRA.  So we did the back door strategy.  After filing their taxes we discovered they were eligible for the Roth contributions.  We contacted the broker dealer and they will not fix.  They tell us to fix it on the tax return.  Now it is 2016 and the 1099R is being issued and we have no idea how to fix on the tax return.  She does have traditional money already so most of the contribution will be taxable if we do not figure out how to fix.

Submitted by Alan - IRA critic on Mon, 2017-02-13 21:21

  • Actually, by doing a 60 day rollover rather than a direct transfer, she DID take her RMD but she rolled it over which is not allowed. I assume the rollover was larger than the RMD and she only has an excess IRA contribution for the amount of the RMD which should be removed in the usual manner.  Therefore, her 2016 RMD was completed on time. She should report the 1099R on line 15 as a rollover, but show the amount of the RMD as taxable income on 15b. She should tell the IRA Custodian the amount of the excess contribution (same as RMD amount) that should be treated as an excess regular IRA contribution and returned with allocated earnings, if any. Any such earnings will be taxable in 2016 because the contribution was made in 2016. An explanatory statement regarding this should be included with the return. She should correct the excess ASAP because she will need to know the earnings on it so the earnings are included on line 15 of her 2016 return.
  • No, she cannot pay tax on more than the RMD amount and any earnings from the corrective distribution.
  • With no tax due, what she should have done last year was to take her RMD separately, then convert a calculated amount in addition to the RMD to a Roth IRA. And the funds should have been moved by direct transfer to avoid exposure to the one rollover limitation. The RMD and conversion could have been done either before or after the direct transfer to the new custodian.

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