94 year old client's IRA - Ed Slott and Company, LLC

Submitted by Eileen Roddy on Fri, 2022-06-17 15:20

My 94 year old client wanted to move $100k from his traditional IRA at ML to his traditional IRA at MS. He spoke with ML and they understood what he wanted to do, but when he submitted the paperwork, he indicated, in error, “regular distribution” instead of “transfer/rollover”. The funds moved trustee to trustee. The 1099-R issued by ML shows $100k in both box 1 and 2a (as taxable distribution), the “Taxable Amount Not Determined” box is checked and the distribution code is 7. The 5498 issued by MS shows the $100k in box 2 “Rollover Contributions”.

Even though it was not the client’s original intention, it would benefit the client to take the $100k into income for 2021 due to really high medical expenses, but he never took the $$s out of the IRA. Is it possible to just take the $100k into income and create $100k of basis even though the funds still sit in the traditional IRA?

Since the 2021 return is on extension, we have asked MS to move the $100k that they received into a ROTH but they have balked at this stating that we need to provide documentation that the correction can be made retroactive to 2021 since the return is on extension. We definitely don’t want a 1099-R for 2022 indicating a $100k ROTH conversion. Do I understand correctly that this can be done?

Thanks for your help. This is a sticky one!

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Permalink Submitted by Alan - IRA critic on Fri, 2022-06-17 16:18

Several issues here. First, you indicated that client made an error and requested a distribution, but if the funds moved by trustee to trustee transfer, that is not a distribution and there should be no 1099R or 5498 issued. Since both were issued and it’s not likely that both custodians made the same error, it appears that the funds were actually moved by a 60 day rollover, and hopefully the client had a rollover available at the time of distribution. In addition, if his RMD had not already been completed, then he rolled over RMD money, which would create an excess IRA contribution.
Client cannot ignore the reported rollover, and a conversion done now would produce 2022 income which would not match up with the 2021 medical expenses. MS cannot legally re do the 2021 rollover as a Roth conversion, except possibly if client did NOT have a rollover available and the funds therefore had to be treated as an excess TIRA contribution. In that case, client might be able to apply Rev Proc 2020-46 using reason 3, but even that is stretching the intended limits of reason 3. Next step is to determine if client had a rollover available on the date of the distribution from ML. If so, then no way for a retroactive Roth conversion for 2021.
The return being on extension is immaterial in this case other than the convenience of not having to file a 1040X if the Rev Proc can be applied and the various transactions made by 10/17. Again, using the Proc would require understanding and cooperation by MS in accepting the self certification form if the recent rollover was in violation of the one rollover limit per 12 months.
Microsoft Word – rp-20-46.docx (benefitslink.com)

Permalink Submitted by Eileen Roddy on Fri, 2022-06-17 18:47

Okay, so we’ll forget the ROTH conversion idea. ML issued the 1099-R which I think is an error, but they will not correct it because the client indicated a regular distribution on the application, despite the fact that it went trustee to trustee.Any problem with just taking the $100k into income on the 2021 return and creating basis in the IRA?

Permalink Submitted by David Mertz on Fri, 2022-06-17 18:54

“Any problem with just taking the $100k into income on the 2021 return and creating basis in the IRA?”
Nothing in the tax code allows that. Nothing can be done now to generate 2021 taxable income. Absent an excess contribution due to rolling over an RMD or violating the one-rollover-per-12-months limitation, the $100,000 rollover is nontaxable and nothing can be done to change that.

Permalink Submitted by Eileen Roddy on Fri, 2022-06-17 19:43

I hope you don’t think I’m arguing with you, as you are an IRA specialist, but if the 1099-R doesn’t indicate that it’s a rollover and the $100k appears in the taxable box and the box is checked Taxable is Not Determined………………how will they know? Why would they question it?The taxpayer did take his RMD in a separate distribution and there were no other rollovers/transfers.

Permalink Submitted by David Mertz on Fri, 2022-06-17 21:25

The IRS can match the Form 5498 showing rollover to the MS IRA of $100,000 with the Form 1099-R showing a distribution from the ML IRA of $100,000, leading to the certain conclusion the rollover is nontaxable. Section 408(d)(3)(A) to the tax code excludes such rollovers from income.
Basis in nondeductible traditional IRA contributions can only come from regular nondeductible annual contributions or from the rollover of after-tax funds from a qualified retirement plan like a 401(k). The tax code provides no method to turn pre-tax money already in a traditional IRA into basis in a traditional IRA. The only mechanism in the tax code to turn pre-tax money in a traditional IRA into after-tax money in an IRA is by conversion to Roth, which had to have been done in 2021 to make it 2021 income.
The marking of box 2b Taxable amount not determined is required for any regular distribution from a traditional IRA because it’s impossible for the custodian to know the taxable amount of such a distribution. The taxable amount is determined by what was done with the distribution and whether the client has any basis in nondeductible traditional IRA contributions. In this case the distribution was permissibly rolled over by the client to another traditional IRA, making the distribution unconditionally nontaxable.
Since MS did what was requested by depositing the funds into a traditional IRA, there is no justification for MS to be able to treat this rollover as a Roth conversion that occurred in 2021. MS has already filed a Form 5498 with the IRS indicating that the rollover was to a traditional IRA since the deadline for them to do so was May 31, 2022.