Is it okay if a financial institution codes a “direct transfer” as a “direct rollover”?

Submitted by Jon Steffen on Tue, 2022-12-20 17:23

My client has an IRA FIA at AIG. We wished to move penalty free dollars out of this contract and over to their IRA at TD Ameritrade.

We submitted the transfer forms via TDA to AIG. AIG sent a check to TDA but said it was a Direct Rollover. This was in fact an IRA to IRA transfer, not a Direct Rollover.

It will take much effort to get AIG to correct their error.

Will letting this oops affect my client negatively in the eyes of the IRS? How much effort should be used to get AIG to re-issue a check with the correct coding as a Direct Transfer?



Submitted by David Mertz on Tue, 2022-12-20 21:04

  • A trustee-to-trustee transfer is non-reportable, so there is no code at all for Form 1099-R.  “Direct rollover” is a term used for rollover to or from a qualified retirement plan like a 401(k), not for a transfer between IRAs.  A trustee-to-trustee transfer of an IRA to another IRA of the same type is neither a distribution nor a rollover.  Both the originating custodian and the receiving custodian need to treat it as a trustee-to-trustee transfer so that neither custodian reports the transaction, no distribution reported on Form 1099-R and no rollover reported on Form 5498.
  • Reporting the movement of the IRA as a distribution and rollover subjects the movement of the IRA to consideration in regard to the one-rollover-per-12-months limitation.
  • If AIG reports a distribution with code G, the implication is that the rollover is to a qualified retirement plan like a 401(k).  The IRS generally requires an explanation statement regarding rollovers from an IRA to a qualified retirement plan because the plan does not report to the IRS anything about receipt of a rollover.
  • There should be no need to reissue the check since the check should already have been made out correctly to the receiving IRA FBO the client per TD Ameritrade’s instructions.  Apparently TD Ameritrade doesn’t need to correct anything because they should already be treating it as a transfer.  The only thing that needs to happen is for AIG to correct the coding in their own system so that is shows as a transfer so that they will not issue any Form 1099-R.  If they do issue a Form 1099-R, they should be compelled to issue a corrected Form 1099-R with zeros in any boxes where they previously reported a dollar amount.


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