IRA Distribution

[kjm1059]

Hello

My client had intended on transferring an IRA distribution from trustee to trustee.  However, this did not happen.  Rather, a check was issued to the client, with the 20% mandatory tax withholding, and then subsequently turned the check over to the new trustee within the 60-day period.

My question involves reporting the transaction on the 1040.  I know that the taxes withheld (20%) are reported as taxable income.  How do I do this?  Do I change the taxable amount on the 1099?  I did see at the bottom of the 1099-R input page that there is a section to indicate the taxable amount.

Any direction would be appreciated.

Thank you

[qbteachmt]

"Do I change the taxable amount on the 1099?"

Perhaps you are confusing their Net and their Distribution?

What code(s) are on the 1099-R? Was this a Trad IRA? Did the remainder go to the same type of account (you should be able to get the account statement for that deposit or the Form 5498)? How old is the taxpayer?

You have a partial rollover. The part that wasn't included will be taxable in most cases; unless you know they have basis in that account?

[kjm1059]

Hello

Thank you for replying.

1099 shows Gross and Taxable Distribution of  $60k with $12k withheld for federal taxes.

It was a traditional IRA and was transferred to a similar account.  The taxpayer is under age 59 1/2 (56 to be exact).  Box 7 is coded "2"

Based on some research, I'm thinking that the $12k is taxable with the remaining $48k treated as a partial rollover.

Hope this helps. 

Thank you very much

[IRonMaN · Accepted solution]

In section B of the 1099R worksheet there is a box to enter the 48K to indicate that it was rolled over.  But before you do that, make sure that the client really did complete the process properly and timely.  Sometimes clients are a little mixed up on little things like dates and amounts ---------- and life in general.

[kjm1059]

Hello,

Thank you.  I was thinking along the same line.

[IRonMaN]

You betcha!

[BobKamman]

Who told you (and/or your client) that 20% withholding was mandatory?  

[qbteachmt]

"Who told you (and/or your client) that 20% withholding was mandatory?"

Are you sure that is a Trad IRA account? Or, perhaps, a SIMPLE IRA or SEP IRA under an employer plan?

Because that's where 20% would be required:

https://www.irs.gov/taxtopics/tc412

[qbteachmt]

Oh, I forgot this part: "Do I change the taxable amount on the 1099?"

You don't change the entry for the 14099-R. That is for money Out, and that is what happened.

You need to note the amount rolled over, and the taxable amount will be reduced.

But you also have Early distribution penalty. That's why the other 20% is supposed to be "made up" when rolling over indirectly.

[kjm1059]

Thank you very much for the info.

I would agree that the 1099 info should not be changed and that "rollover" needs to be shown on the tax return.

The payer withheld 20% as required.  My research shows that Section 3405 (c) (1) speaks to the mandatory withholding by the payer.  

In this case, there's no early withdrawal penalty because Code 2 is used in Box 7, not Code 1 which signifies early withdrawal.

Thank you again for your assistance.  Very helpful

[qbteachmt]

Again, there is a 20% mandatory withholding from accounts under employer plans. Not under Trad IRA; that is only 10%. You mentioned 20% mandatory withholding. What is the account type as marked on the 1099-R? What is the taxpayer's account type?

From: https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

"Will taxes be withheld from my distribution?

• IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.
   
• Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding."

Code 2 is an Early Distribution code, where an exception might apply:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...

Your taxpayer has a split activity. Do you know of an exception for each partial amount? Or, at least one of the amounts is subject to penalty?

[Skylane]

<< But before you do that, make sure that the client really did complete the process properly and timely.  Sometimes clients are a little mixed up on little things like dates and amounts >>

When they do screw up the rollover, see Rev proc 2016-47.   Fiduciaries will accept the self certification and (late) rollovers.