IRA Distributions
Hello Mr. Slott,
You come highly recommended by a friend, so I am writing to you to ask a tough question.
I am 63 years old, still working and not retired. In 2023 I wanted to rollover some of my Traditional IRA money from my Trustee organization to a like IRA at my bank. I did 2 Indirect Rollovers within a two week period, and deposited them into a like IRA at my bank on the same day. There was no withholding done by the first Trustee.
I found out in January 2024 that the second check was an Ineligible Rollover. I now know you can only do one Indirect Rollover in a 12 month period. I had my bank withdraw the amount of check #2 right away in January 2024, and it’s interest earnings, and it was put into a cash account at my bank.
On my Federal Tax Return, I will put the amount of check # 2 and it’s interest earnings while in the bank IRA, on my 2023 Form 1040, Line 4b as taxable income (and the amount of both checks will go on Line 4a.) I am to write “rollover” on the dotted line of 4b. I am also to attach a letter to my return to explain what I did. My bank is to issue me Form 5498, which would have the amount of the Rollover from check #1, as well as the “excess contribution” from check #2. The bank will also issue me a 1099-R, and Line 7 coded as “P” excess contribution.
However, when it comes to the 2023 PA-40, am I to pay tax on any part of the Ineligible Rollover? The first Trustee 1099-R for the Ineligible Rollover, Line 7 is coded as “7” Normal Distribution.
Or will PA tax me only on the interest that the Ineligible Rollover earned while in my bank IRA ? And since that interest was turned over to me in 2024, it will be on a 2024 1099-INT from my bank, is that correct?
I read in the PA-40 Instructions, page 12, under IRA Withdrawals, that I am to be taxed on the Ineligible Rollover which was a Distribution to me, to the extent that it exceeds the original contribution. It says use the cost recovery method, and take the total distribution and it’s earnings, and subtract my adjusted basis (my original contribution) in the IRA. The remainder is my taxable Income for PA-40, Line 1.
My friend read this part of the Instructions and believes it is only referring to those who are under age 59 1/2 years old. She says that Pennsylvania does not tax your IRA distributions if you are over 59 1/2, nor do they tax the earnings that the IRA earned over the 21 years it was in the IRA. PA would tax only the interest it earned while in my bank.
If my distribution from my Traditional IRA is not taxable (because I am over 59 1/2 and it is a qualified retirement plan), then do I need to include my 1099-R Forms with my PA Tax Return?
One more worry; will I be in any trouble with the IRS because neither the first Trustee, nor my Bank, took any Withholding?
I appreciate your reading this and anything you offer in feedback.
Sincerely,
Mary
Permalink Submitted by Alan - IRA critic on Tue, 2024-02-27 19:21
Note that the Slott team does not participate or monitor this website. All responses are from volunteers including myself.
Sorry you got hit with the one rollover in 12 months limit, but you understand that the second distribution was not eligible for rollover and must be reported as taxable, but no penalty as you are over 59.5.
You should not be taxed on the second distribution for PA, but probably will be on the very small amount in Box 2a of the P coded 1099R for the removal of the excess contribution. While this P coded 1099R will not be issued until next January, the P code means that the amount in Box 2a will be taxable on your 2023 federal return because the excess contribution was made in 2023. That amount in Box 2a will also be taxable on your 2023 PA return.
You should report the withholding on the second distribution with your 2023 return and you will get credit for the withheld amount on that return.
The withholding was done on the distribution that was not eligible for rollover. But since it was probably withheld @10%, it may not be enough to cover the taxes on that distribution. But you still may have paid enough in tax so that there is no underwithholding penalty for 2023.
Permalink Submitted by Mary MacNeill on Sat, 2024-03-02 17:14
Thank you Alan. The IRS told me the same thing; that the ineligible rollover, which is an “excess contribution”, AND it’s earnings while it sat in the IRA for several months, and will be reported by my bank in 2024 on a “P” coded 1099-R, and must be reported as income on my 2023 Form 1040.However, for the amount taxable on your 2023 PA return I would think, are the earnings (interest) that the ineligible rollover accumulated while it sat in the IRA for months. The bank showed me that the 2024 “P” Coded 1099-R will show a Gross Distribution on Line 1 which equals the excess contribution AND it’s earnings. But they have not shown me Line 2a. In any case, I do know what those earnings were, as the bank issued the earnings to me in a separate check so that there would be a documented amount of total earnings. You say that the earnings should be taxable on my PA return for 2023. But I do not have a 20231099-INT for that interest, and the 2024 1099-R will have the interest and the excess contribution combined on Line 1.Would you be able to add some clarity?I did not have any withholding taken and will have to just see what I end up owing, taking into account that I may not qualify for some of my past credits like the Earned Income Credit, since my income is going to be almost $30,000 more in 2023. I hope that I do not get an underwithholding penalty for 2023.
Permalink Submitted by Alan - IRA critic on Sat, 2024-03-02 18:21
The bank should not report the amount of gain on the excess contribution that was removed on a 1099 INT. It should be shown in Box 2a of the 2024 P coded 1099R for which the 2a amount is taxable in 2023, but you already know what the earnings were by subtracting the amount of the excess contribution from the gross amount you received. Those earnings should be reported on your 2023 federal return and PA return per the following copied from PA Form 40 Inst:
“If any Forms 1099-R included with the return include distributions of excess contributions and earnings on the excess contributions (distribution Codes 8 and/or P in Box 7 of the 1099-R), the distributions are taxable for PA personal income tax purposes to the extent there are earnings or excess employer contributions included with the distribution. You must include a letter or other documentation from your employer or plan administrator with your return that provides the amount of excess employee contributions only. Include any earnings on the excess contributions or any excess employer contributions as taxable compensation on Line 1a of the PA-40.”
Permalink Submitted by Mary MacNeill on Sat, 2024-03-02 18:48
Thank you for the clarification.Your response was very helpful!