Transfers Are Nonreportable; No Such Thing as Prior-Year Conversion; 12-Month Limit Only for IRA-to-IRA Rollovers
By Carrie Horn, QPA, TGPC, CISP, CHSP
In 2020, we had a client transfer his Traditional IRA from another financial organization to an IRA with our organization. The client completed the appropriate IRA transfer paperwork and the other organization sent the funds by check payable to our financial organization as custodian for the customer’s IRA. We deposited the funds into the Traditional IRA as a transfer. Our client received a 2020 IRS Form 1099-R showing this as an IRA distribution and the other financial organization is refusing to correct it. Is there anything our client do to avoid paying taxes on the distribution?
As you’re aware, an IRA-to-IRA transfer is a nonreportable transaction. If the sending organization (the payer) reports the transaction as a distribution on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., the IRS will think that a distribution occurred and that it will be includible in the IRA owner’s taxable income. Thus, it’s important that the Form 1099-R be corrected.
The IRA owner should contact the sending organization and provide copies of the transfer paperwork to show that the transaction was requested and completed as an IRA-to-IRA transfer, and ask the sending organization to issue a corrected Form 1099-R. He should also retain documentation of how and when he contacted the sending organization with his request. If the sending organization refuses to correct the Form 1099-R, he can then go to the IRS.
The IRS provides Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to be used by tax preparers as a substitute for Forms W-2, W-2C, and 1099-R. According to the instructions, IRA owners who do not receive corrected forms from payers by the end of February of the year the Form 1099-R is received may call the IRS at 800-829-1040 for assistance. The IRS will contact the payer to request the corrected Form 1099-R and also issue a Form 4852 to the IRA owner. If the IRA owner does not receive the corrected form in sufficient time to file his tax return timely, he may complete Form 4852 as directed in the instructions and attach it to his tax return. IRS Form 4852 requires that the IRA owner complete the questions in Line 8, Form 1099-R, as they should have been on a correct Form 1099-R (e.g., for a transfer, enter $0 as the gross distribution). Specific details are found in the instructions.
A client completed a conversion of her Traditional IRA to her Roth IRA on February 2, 2020. We showed this as a conversion on the 2020 IRS Form 5498, but the client is now stating that this was a prior-year conversion for 2019. She is asking us to correct the Form 5498 to show it as a 2019 conversion. Can this be done?
No. IRA owners frequently get the conversion rules confused with the IRA contribution rules. Unlike making IRA contributions, conversions can never be done after December 31 for a prior year, even if they are completed before the IRA owner’s tax filing deadline. You are correct in reporting the conversion contribution on a 2020 Form 5498, IRA Contribution Information, because the conversion took place in 2020.
An IRA owner rolled over his 401(k) plan balance to a Traditional IRA in January 2021. In February 2021, he converted his Traditional IRA to a Roth IRA. Now he’s requesting to move his Roth IRA to a different financial organization as a distribution and rollover within 60 days. Is this permissible or will he violate the one-per-12-month rollover limitation?
This is a permissible transaction for the IRA owner. The 12-month limitation on rollovers only applies to rollovers between IRAs (e.g.., Traditional IRA to Traditional IRA or Roth IRA to Roth IRA). An IRA owner may roll over only one IRA distribution in a 12-month period, regardless of the number of IRAs he owns. But rollovers from qualified retirement plans, including 401(k) plans, are not included in this rollover restriction. An IRA owner may perform an unlimited number of rollovers between an IRA and a retirement plan, such as a 401(k) plan. Also, there are no restrictions on the number of Roth IRA conversions that an IRA owner may perform in a 12-month period, as long as the multiple conversions do not involve the same assets.
