March 2025
Q-1. Helping a customer who has the wrong understanding of a distribution/rollover.
We have a customer who received their 1099-R, and they’re questioning the amount. The 1099-R distribution amount was $24,250.00. They did a distribution for this amount on 8/01/2024. Then on 09/26/2024, they put $10,000.00 of that back into the IRA. We need to get them a corrected 1099-R to reflect the correct distribution amount. But how does the $10,000.00 need to be coded on our system to reflect that it wasn't an actual contribution and it was actually put back into the IRA before the 60-day deadline?
A-1. The customer does not understand the IRS procedures for this situation. The IRS requires an IRA custodian to report all distributions and all contributions on various tax reporting forms. There is to be no “netting” of two transactions. The individual needs to complete his tax return and explain why the entire $24,500 is not taxable.
The customer withdrew $24,500. He did not withdraw $14,500. His 2024 Form 1099-R must show he withdrew $24,500.
He made a rollover contribution of $10,000 within the 60-day limit. You want to use the appropriate transaction code for a rollover contribution. This rollover contribution is to be reported in box 2 on the 2024 Form 5498. That form will be provided to him by 5/31/2025.
I understand he must complete his tax return as follows: box 4a is completed with $24,500 and box 4b (taxable amount) is to be completed with $14,500. He is to write “RO” next to line 4 b to inform the IRS that he made a rollover. He should discuss/confirm with his tax accountant.
Q-2. Direct rollover vs. rollover.
I have a client that would like to transfer a Roth 401(k) to our bank. There is nothing special I need to do for this is there? Just set it up as a transfer into a Roth with us from his work 401(k). We don’t have too many of these, and I want to be sure I am doing it correctly.
A-2. Whenever funds move into a traditional IRA or Roth IRA from a 401(k) plan, the movement is a direct rollover. The movement is not a transfer because it must be reported to the IRS and the individual.
The 401(k) plan will report a direct rollover distribution occurs. This is reported on a Form 1099-R. The Form 1099-R gets prepared specially when the distribution is directly rolled over.
The Roth IRA custodian reports this rollover contribution in box 2 on the Form 5498 for the Roth IRA.
The individual will prepare his or her tax returning showing that the distribution was not taxable because it was rolled over. Lines 4 and 4b will need to be complete on the Form 1040.
The 401(k) plan will have the individual complete a special distribution form. The individual will complete and instruct that the Roth 401(k) finds are to go into a Roth IRA.
Q-3. I have a customer who just retired from our local county sheriff’s office. He has a Missouri Lagers account with the state which he is wanting to roll over to an IRA with us. Will I fill out a CWF 40T as a rollover account application and a CWF 54 as a direct rollover contribution.
We have received the check directly from the Missouri Lagers.
A-3. Yes, those are the two forms to be completed when a new IRA is being established because a person has directly rolled their retirement plan funds. He will also have his forms for his time deposit or other investment.
Q-4. Correcting - Reported as a distribution/rollover when it was a transfer.
I have an issue where a customer did an Internal IRA Transfer from one of their IRAs to another IRA within our institution and it generated a 1099-R for the full amount which was received by the customer. The customer contacted me concerning this. We have corrected it in our system, but the file was already sent to the IRS showing a 1099-R was generated and reported. My question is, how do I correct this on the 1099-R that I need to process manually? Do I enter $0.00 for box 1 (gross distribution) and $0.00 for box 2a (taxable amount)? Also, as you know transfers are not reported so what needs to be entered in box 7 (distribution code)?
A-4. Yes, complete the corrected Form 1099-R just as the original was completed, but show 0.00 in box both 1 and 2a. The reason code stays the same.
You could also furnish a short note to the individual explaining what has happened. The individual should attach the corrected Form 1099-r and this note of explanation to their tax return.
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