TRANSFERRING IRA FUNDS AND YOUR ROTH IRA: TODAY’S SLOTT REPORT MAILBAG

Hello Mr. Slott,

Thanks for your educational broadcasts. I have run into something that might hold your interest. In two separate situations I have asked that retirement checks be made payable to an IRA at another large institution mailed FBO “my name” then mailed to me. One is IRA to IRA, the other is Qualified retirement plan by a former employer to an IRA.

In both cases the sender has wanted to term the distribution as a rollover. I was able to get the coding on one changed after the fact (with much ado) and have not yet done the other. The IRS is clear that these are NOT rollovers:

IRS publication 590-A: https://www.irs.gov/publications/p590a#en_US_2017_publink1000230589

“A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee’s request, isn’t a rollover. This includes the situation where the current trustee issues a check to the new trustee but gives it to you to deposit. Because there is no distribution to you, the transfer is tax free. Because it isn’t a rollover, it isn’t affected by the 1-year waiting period required between rollovers.”

Are institutions this incredibly unclear on IRA regs? Do you have any suggestions?

Thanks,

Howard

Answer:

Howard,

As you are probably aware, the tax code and its regulations can be confusing, not only to everyday taxpayers, but to financial professionals as well! It is extremely easy to confuse tax concepts or to read a tax rule outside of the proper context. I think that is the case here. The terms “direct transfer” and “direct rollover” are interchangeable and have the same meaning when we are talking about distributions from IRAs and qualified retirement plans. Technically, the tax code calls the IRA transactions “direct transfers” and the retirement plan transactions “direct rollovers.” In either event, the distribution is made payable to another IRA or qualified retirement plan, is not taxable to the individual, and does not trigger the withholding rules. In other words, the same tax rules apply to both terms. If the coding on the 1099-R issued by the plan is code G, then it has been issued correctly. You did a direct rollover from your plan to an IRA. It is a reportable transaction. You will include the full amount on line 16a or its equivalent on the 2019 tax return and on line 16b or its equivalent, you will put zero and the notation R for rollover. For the IRA transaction there should be no tax reporting. Transfers from one account to another where the check is not payable to you are not reportable.

The IRS publication you cited deals with the once-per-year rollover rule. This rule only applies to 60-day rollovers that are IRA-to-IRA or Roth-to-Roth. There are many exceptions which do not count against the limit, such as all transactions with a qualified plan, direct rollovers/transfers, or conversions. The above cited section is discussing why a direct transfer/rollover from an IRA to another IRA does not trigger the rule.

Question:

Hi Ed (and company),

I’ve read several of your articles and am still not 100% sure on what happens to Roth earnings. My tax advisor seems to think that my basis is what I rolled over from a traditional IRA in 2012.  After withdrawing that amount (I am 61 YO) she says that remaining earnings/appreciation of investments will be taxed as ordinary income. Is that correct?

Thanks,

JR

Answer:

JR:

I disagree. If a distribution from a Roth IRA is qualified, then both the basis and the earnings will be distributed tax and penalty free. This is one of the reasons Roth IRAs are so attractive!  In order to be a qualified distribution, the distribution must occur after the account has been open for five years, and met one of the following conditions: