How Do I Report a Tax-Free Rollover on My Tax Return?

By Joe Cicchinelli and Beverly DeVeny
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This week’s Slott Report Mailbag examines a situation involving a spousal IRA beneficiary (the exact topic we detailed in this month’s IRA Focus) as well as the procedure for reporting a tax-free IRA rollover at tax time (a key issue with April 15 right around the corner). As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

I have a question concerning the statement in chapter 4 of Ed’s book, The Retirement Savings Time Bomb and How To Defuse It (on page 141 in the 2012 paperback edition). It reads, “If the spouse is the sole beneficiary and chooses to remain so rather than rolling over, then he or she must begin taking RMDs (required minimum distributions) by whichever is later: Decemeber 31 of the year the IRA owner would have turned 70 ½, or December 31 of the year following the IRA owners death.” I understand how this works when a younger spouse inherits from an older deceased spouse. But what about the alternative case? My spouse is 62 and has $50,000 in IRAs. I am 70 and the sole beneficiary.  The statement “One situation where it [remaining a beneficiary] pays off is if the spouse is much older than the deceased” on the previous page infers that I can delay taking RMDs until she would have turned 70 ½, and then as her sole beneficiary and spouse, can roll over her IRAs and begin taking RMDs based on my own life expectancy. Can you confirm this to be the case, and if so, how to implement it

Answer:
In your scenario, if your wife were to pass away at age 62 (and you did not do a spousal rollover to your own IRA) then you could wait until she would have been age 70 ½ before you had to start taking death distributions over your single life expectancy. By remaining as a beneficiary, you can delay having to take minimum distributions on the IRA funds your wife left you (this is a key topic in this month’s IRA Focus – you can subscribe here). The only thing you have to do to implement it is set up the IRA as a properly titled inherited IRA. In the year before your wife would have been age 70 ½, you should roll her IRA over to an IRA in your own name. This way your beneficiaries can stretch distributions over their life expectancies after your death.
 

2.

An uncle of ours was the beneficiary of an IRA that his recently deceased daughter had set up. He in turn set up several IRA accounts with family members as beneficiaries. Our uncle just passed away and now each family member has to decide what to do with their account.

Question #1: Can an inherited IRA be reinvested in either another IRA or annuity of the family member’s choice?

Question #2: Since the uncle was in his 90’s, must the family member take distributions even though they are under 70 ½.

RM

Answer:
Yes. The beneficiaries are free to change investments within the inherited IRA at any time. If the investments they prefer are at a different financial institution, then the inherited IRA funds must be transferred to an inherited IRA with the new institution. The family members must continue taking distributions using their deceased uncle’s remaining single life expectancy even though they are under age 70 ½.
 

3.

Is there a form that the trustee of the IRA should send to the IRS to show that the money was replaced?  I have received a 1099 and the tax program won’t let me put the whole amount in as a contribution. I am very frustrated and do not want to pay the taxes on this money that I did not have in use.

Answer:
The trustees report all IRA contributions and rollover deposits to the IRS using Form 5498. You will receive a copy of that form at the end of May 2015, for any 2014 contributions or rollovers you made. The tax software is correct in not allowing you to input the amount rolled over as a contribution. It should go in as a 60-day rollover. The amount on the 1099-R should go in on line 15a of the 1040, and on 15b you should put zero (assuming you have rolled over the entire amount). Then a letter R goes on line 15b to tell IRS that you did a rollover. You may need to consult with a tax-preparer to make sure you report a tax-free rollover correctly on your federal income tax return.