Rollovers vs Postponed/Late Contributions vs Repayments
by Agatha Schmidt, CISP, SDIP, CHSP
I have a client who has a check from another financial institution where she had an IRA. She wants to deposit the check into her IRA at our financial institution. How should we code this deposit?
Review the check to determine for whom it is written. If the check is made payable to the receiving financial institution (e.g., “ABC Bank FBO Jenny Doe’s IRA”), you should code the deposit should as a transfer. A transfer is a nonreportable transaction: the distributing financial institution should not report the disbursement on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and the receiving financial institution should not report the contribution on Form 5498, IRA Contribution Information.
If the check is made payable to the client, you should code the deposit as a rollover contribution. An IRA-to-IRA rollover is subject to the 60-day rollover rule and to the one-per-12 month rollover rule. To ensure these rules have been met, your financial institution should have the client sign a contribution form, verifying that she is eligible to roll over the assets. This form can also be used to capture the client’s irrevocable election to treat the deposit as a rollover contribution.
Unlike transfers, rollovers are reportable transactions: the distributing financial institution must report the distribution on Form 1099-R, and the receiving financial institution must report the rollover contribution in Box 2, Rollover contributions, of Form 5498.
I have a client who received a distribution from his 401(k) plan. He would like to deposit that amount into his IRA at our financial institution. How should we handle this?
Assets that are distributed from an eligible retirement plan (i.e., a qualified retirement plan under Internal Revenue Code Section 401(a) or 403(a), a 403(b) plan, or a governmental 457(b) plan) and are deposited into an IRA should be coded as a rollover contribution, regardless of who the check is made payable to. With a direct rollover, the check is made payable to the financial institution holding the receiving IRA. Direct rollovers are not subject to the 60-day rollover rule or to the one-per-12-month rollover rule. With an indirect rollover, the check is made payable to the IRA owner. While indirect rollovers are subject to the 60-day rollover rule, they are not subject to the one-per-12-month rollover rule.
Regardless of the type of rollover, your financial institution should require the IRA owner to verify that he is eligible to complete the rollover by having him sign a contribution form that also captures his irrevocable rollover election. Your financial institution must also report the amount coming in as a rollover contribution in Box 2 of Form 5498.
I have a client who misplaced his IRA distribution check. He recently found the check and would like to complete the rollover even though the 60-day time period has expired. Can we accept this as a rollover contribution?
Generally, IRA assets received past the 60-day window are considered ineligible for rollover treatment. But Revenue Procedure 2020-46 allows individuals to roll over assets past the 60-day period under certain circumstances. IRA owners may self-certify that they qualify for relief from the 60-day rule if they missed the deadline because of one or more reasons listed in the guidance. An IRA owner may make this self-certification by completing and signing the model self-certification letter in Rev. Proc. 2022-46 or a substantially similar letter or form provided by your financial institution.
Your financial institution should report self-certified late rollover amounts in Box 13a, Postponed/late contribution, with code “SC” in Box 13c, Code.
I have a client who is in the US Armed Forces who was deployed in 2021 through 2022 and would now like to make a contribution for 2021. Can we still accept her contribution?
Yes. Certain military personnel and individuals serving under the direction of the US Armed Forces (including their spouses) may generally postpone their contribution deadline by 180 days after their last day of service in a qualifying area, plus the number of days that remained to file an income tax return for the tax year in which the individual entered a combat zone.
For example, if Jane Doe entered a combat zone on September 30, 2021, before making her 2021 contribution, and left the combat zone on September 1, 2022, she has until June 16, 2023, which is 288 days (180 days plus 108 days [January 1, 2022, to April 18, 2022]) to make her 2021 contribution.
Your financial institution must report such contributions in Box 13a, Postponed/late contributions, of Form 5498. The tax year for which the postponed contribution was made should be reported in Box 13b, Year, and a specific code to indicate the combat zone should be entered in Box 13c, Code.
How do we handle repayments of coronavirus-related distributions, disaster-related distributions, and qualified birth or adoption distributions?
IRA owners who took coronavirus-related distributions (CRDs) in 2020 may repay those distributions to their IRA or retirement plan over a three-year period, which begins the day after the date of the CRD. Because individuals had until December 30, 2020, to take a CRD, 2023 is the last year that individuals can make these types of repayments. The IRS has not released official reporting guidance. But unofficially, the IRS has indicated that financial institutions should report these repayments similarly to how they would report disaster-related distribution repayments. According to the Instructions for Forms 1099-R and Form 5498, financial institutions should report disaster-related distributions on Form 5498 in Box 14a, Repayments, with code “DD” in Box 14b, Code.
IRA owners may also repay distributions taken to pay for the birth of their child or the adoption of an eligible adoptee. The SECURE 2.0 Act of 2022 states that IRA owners may repay these distributions, known as qualified birth or adoption distributions (QBADs) over a three-year period. The Instructions for Form 1099-R and Form 5498 specify that financial institutions must report QBAD repayments in Box 14a, Repayments, with code BA in Box 14b, Code of Form 5498.
