Incorrect 60-day rollover Correction

Submitted by Matt Goyen on Thu, 2019-01-03 15:08

74 year old individual was rolling his 403(b) to IRA. The 403(b) company incorrectly processed two RMDs (one systematic that was already established and one due to the rollover). In order to correct this the individual did a 60 day rollover of one of the RMDs. When the individual attempted to deposit the checks in their bank account one of the checks bounced. Calling the 403(b) company they said they cancelled the 2nd RMD as it was done in error.

This means the 60-day rollover negated the 403(b) RMD. Being that it is 2019 and this was a 2018 RMD what is the best thing to do to fix this situation.

Thanks



Submitted by Alan - IRA critic on Thu, 2019-01-03 16:37

  • If two RMD checks were distributed and the plan stopped payment on one of them, the RMD is still completed and there should be a 2018 1099R reporting the distribution of one check, which will be reported on individual’s tax return. However, rolling over this distribution results in an excess contribution which must be corrected in the usual manner. If explained to the IRA custodian correctly, the 1099R from the IRA custodian next year should be coded to reflect an excess distribution. Only the gains on the contribution while in the IRA will be taxable. Any increased IRA balance on 12/31 used to calculate the IRA 2019 RMD as a result of this rollover cannot be disregarded in determining the IRA 2019 RMD, and the distribution of the excess contribution will not count for purposes of completing the 2019 RMD.
  • Again, to your main question, the 403b RMD is considered completed so there is no Form 5329 needed to request a penalty waiver. But the rollover of it to an IRA is not allowed, so an excess IRA contribution must be returned with any earnings. Earnings (if any will be taxable in 2018), so they should be included in the 2018 tax return. 

Submitted by Matt Goyen on Thu, 2019-01-03 20:37

Thank you for your response. To clarify, they should not report the rollover on their 2018 taxes, correct? The only tax implications this should have is the earnings to be reported for 2018?

Submitted by Alan - IRA critic on Thu, 2019-01-03 20:56

Yes, that is correct. The 1099R from the plan should only report one RMD and that is taxable income for 2018. The rollover should not be reported as the rollover of RMD money and is treated as an excess regular IRA contribution (not a rollover contribution) requiring a corrective distribution.  The IRA issued 5498 in May will probably still indicate a rollover contribution and will not be corrected. An explanatory statement regarding this series of transactions including the corrective distribution should be included with the 2018 return if possible because the 1099R for the IRA corrective distribution will not be released until 2020.

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