2020 RMD reversal using "like property"

[rolanddawson2500]

Per the CARES Act, we reversed our 2020 RMD from the accounts we had taken the full RMD in January 2020. We did this by transferring the market value of the full RMD's (Husband and Wife separate IRA's) from mutual fund shares from the IRA's to our joint taxable brokerage account, no tax withholding (pay quarterlies). When the CARES act passed, we elected to do a like property exchange (moved the exact number of shares we had taken out back into the IRA's) back into the IRA's in July (B4 the 8/31/20 deadline).

The Broker gave us a 1099R that reflects the full RMD's being taken in 2020, with NO reversal. The say they will file a "rollover" form (IRS 5498, ~May 21)later in the year the shows the rollover. I assume the gross will report in Line 4a of the 1040, but I do not know what to use in line 4b to show for the reduction for the rollover. To further complicate it, the market value when I put the funds back in was lower than when I took them out, AND part of the IRA was post tax funds.

1) Is the rollover the value of the funds when I took them out, or the value of the mutual funds when I put them back in. (The actual shares out and in are identical to the .0001 shares, but the market value is considerably different.

2) How do you handle the issues with the 8606 schedules, since I took no post tax funds in 2020? (I would assume this is a common problem with everyone who reversed a IRA that had post tax funds in them, whether you paid back with cash or property?)

3) Finally, I am getting conflicting advice, is the difference between the market value of the removal and the market value of the returned shares taxable, or since it is like property (actually identical property, in one case that actual shares taken out) is the rollover $0 taxable.

What a mess, tax law is way to complicated, I thought we were doing a like property, and our 1099R would show no transactions in 2020. Now I have something that looks like an IRA audit flag. HELP!

[dmertz]

If you rolled back all of the same shares, the dollar amount rolled over is the same as the value on the date of distribution, not the value on the date of the rollover.

I'm concerned about your statement saying that you rolled over "like property."  Generally speaking, the shares rolled over must be the exact same shares that were distributed from the IRA.  You are not permitted to sell the distributed shares, repurchase the shares and then roll over the repurchased shares.  Upon distribution the shares acquired a cost basis of the share value on the date of the distribution from the IRAs, so the shares that were returned must be the ones with that same cost basis.  If you had other shares of the same type in the non-retirement brokerage account, you'll need to make sure that the ones with the correct cost basis (the exact same shares) were the ones that were rolled over so that the cost basis of the shares that remain in the brokerage account is correct.

With all of the distributed shares rolled over, nothing regarding these shares is to appear on Form 8606.

[rolanddawson2500]

Thank you. What the Broker did was roll the shares back into the IRA, but he rolled them in at the cost basis of the day they were put back in the IRA. They have given me 1099's for the full amount of the original withdrawal, and say they will do 5498's in May or June, showing a rollover of the market value (which was less than the market value of the original withdrawal) when the shares were moved back into the IRA. (Basically made it look like a cash payback, I guess.) They have already given me the 1099R's with the full amount. 

Based on this, it looks like I should show what the 1099's show in line 4a , and show on line 4b (taxable amount) the difference between Market Value when taken out and Market value when put back in, which was about 8% less than the original distribution (but same number of shares). This would be marked as "Rollover". The shares put back in were not purchased, they were the ones taken out, but I have been using average cost in taxable cost for 20+ years, to much to keep track of, and we rarely sell anything.

Does this sound right IF they do the 5498's showing a rollover of the market value when put back in? (As to the 8606, I have other IRA's, and I will apparently have some taxable income from this transaction. However, it will be the same as if I had sold the shares, then repurchased them with cash inside the IRA?

(Thank you for your earlier response, I think I got some bad advice from the broker, would have been clearer is I had sold them in the taxable account and transferred the cash back into the IRA and bought the shares then I guess.)

[dmertz]

---

he rolled them in at the cost basis of the day they were put back in the IRA.

I'm not quite sure what you mean by that.  Cost basis of any particular shares is the value of the shares on the date that they were purchases outside of a retirement account or the date that they were distributed from a retirement account.  The date that the shares were put back into the IRA has nothing to do with determining their cost basis.  Because the same shares must be rolled back to the IRA, they are required to take away from the non-retirement brokerage account the cost basis of those particular shares which is equal to the value that the shares had on the date of the distribution from the IRA.

---

and say they will do 5498's in May or June, showing a rollover of the market value (which was less than the market value of the original withdrawal) when the shares were moved back into the IRA.

That's correct, the rollover contribution shown on the Form 5498 will reflect the value on the date that the shares were returned to the IRA.  Because this will look like it disagrees with the reporting of a full rollover on your tax return, you'll need to include an explanation statement with your tax return explaining that what would normally suggest a discrepancy is the result of in indirect in-kind rollover.

I have been using average cost in taxable cost for 20+ years, to much to keep track of, and we rarely sell anything.

---

Yes, I thought about that possibility.  Shares distributed in-kind from a retirement account will normally be treated by the brokerage as non-covered shares, so their cost basis would generally not be averaged together with any covered shares.  Assuming that's the case here, if the brokerage does not revert the average cost basis of your non-covered shares to what it was before the shares in question were distributed to the brokerage account, you'll need to track the correct cost basis for the uncovered shares yourself; the average cost basis of any of the other non-covered shares of this stock or mutual fund tracked by the brokerage will be incorrect.  The rollover of all of the shares in the December distribution must make everything go back to the way it was before the distribution both in the IRA and in the brokerage account.  Even though the brokerage might have reduced your basis by the average cost as a result of the rollover, it really has to be treated as a rollover of the same lot that was distributed from the IRA.

---

it will be the same as if I had sold the shares, then repurchased them with cash inside the IRA?

---

No, it wouldn't, because of the difference between the value on the date of the distribution and the value on the date of the rollover contribution.  Selling them outside the IRA would result in a recognizable capital gain or loss, so even if you sold the shares outside the IRA and repurchased them inside the IRA at the same price, the result would not be the same as an in-kind rollover which is not permitted to result in any recognizable capital gain or loss.

---

would have been clearer is I had sold them in the taxable account and transferred the cash back into the IRA and bought the shares then I guess.)

---

That is not permitted.  If shares are distributed in-kind from an IRA, the rollover of that distribution must be the same shares that were distributed, not any kind of substitute.

[rolanddawson2500]

I am off the try to get broker to clarify what my taxable portion is. I appreciate the clarifications above. However, what I have now is a full 2020 RMD distribution on 2 IRA's on a 1099, and assurances that "something" will be filed on a 5498 in the future (May, well after April 15th).  I think it will be the value of the shares when they were moved back into the IRA (taken out in Jan, put back in July, before 8/31 deadline). On other IRA's, I simply get a 1099 showing the amount rolled over, with a G code (direct rollover). A real headache, since part of the money is post tax, and i have other IRA's/457'sand and a TSP account to deal with. Ugggh.

[dmertz]

---

On other IRA's, I simply get a 1099 showing the amount rolled over, with a G code (direct rollover).

---

Code G is never to be used when funds are moved IRA-to-IRA.  Code G only applies to funds moved by direct rollover from or to a qualified retirement plan (401(k), 403(b), 457(b) or federal TSP).  A direct rollover only occurs if you never had control of the funds outside of a qualified retirement account.  If these transactions were did not involve a qualified retirement plan or you had control of the funds outside of the retirement account, the only permissible code for box 7 of the Form 1099-R is code 7.  (I assume that these are not Roth IRAs.)

Are these code G Forms 1099-R instead reporting rollovers from qualified retirement plans to your IRAs rather than any repayment of a distribution that was originally intended to be an RMD?

[rolanddawson2500]

OK, I talked to Tax Department at brokerage about like property. They stated the 1099R will show the full amount taken from the account (value of shares day transferred from IRA to Brokerage account). In May (or thereabouts) they will issue a IRS 5498 (I assume box 2) showing that the shares were returned at the total value of the shares on the day they were transferred back into the IRA. (This was less, as the market was down.) They do not do the 5498 till after 4/15 since you can add money for preceding tax year into IRA till filing. The difference between the out and in will be taxable income. This will be marked as a rollover in the difference shown between box 4a and 4b. (We had 3 "rollovers" in 2020.) I can force this in the TT program by showing it as a Rollover. They have confirmed the numbers they will be reporting as being put back in our IRA accounts.

He stated that I could talk to a tax professional, and might be able to go the full amount back in, since it was the same "property" (to .001 share) out and in. Based on above discussion, way over my head, not enough money to argue about, I am just going to make it the way they report it. Part of this will then flow through the 8606 process on post tax IRA contributions. I wish now I had just put cash back in. 

[rolanddawson2500]

"Are these code G Forms 1099-R instead reporting rollovers from qualified retirement plans to your IRAs rather than any repayment of a distribution that was originally intended to be an RMD?"    Yes, direct rollover from IRA to 457 with same trustee.

I finally talked to the tax department at the brokerage. As I indicated above, they have issued 1099R's for what would have been my RMD from these accounts in 2020, taken in January of 2020 by transferring shares that had the day taken value into our taxable brokerage account. In July, we transferred back in the same (to the 0.001 share) number of shares. They are going to then issue (~ May 21, have to do it after the 41/15 cutoff for 2020 contributions) showing that we put the shares back in, at the value the day we transferred them back to the IRA. The value they transferred back in is less than the value transferred out due to the market decline from Jan 2020 to July 2020. The difference is taxable, they have given me the Jan 2020 value out of IRA on the 1099R, and the value in (July 20) which they will report on 5498. I will report the Gross 1099R on line 4a and the net taxable on 4b, being careful to say none of them are RMD's in TT interview sheets. This will wend it's way through the 8606's (Posttax contributions) with our other IRA's, TSP, and 457.

As I review comments above, I should probably not try to put cash equivalent to the loss between January and July back into the IRA to wipe out the taxable portion? In other links on this issue, they say you can put in cash equivalent to your withholding. I would like to put the cash back in, as I am right on the cusp of being able to drop one level in IRMMA on Medicare surcharge. Kinda irritating, as I put back in exactly what I took out (in share numbers of same fund), but timing value is taxable. 

[dmertz]

---

The difference is taxable,

Wrong.  The result of a rollover of the entire amount of any distribution (other than a rollover from a traditional account to a Roth account), in-kind or not, produces the same taxable result as if the distribution never happened.  The difference between the share value at the time of the distribution and the time of the rollover contribution is not taxable because the same "property" is rolled over.

Ignoring the 0.001 share difference, you rolled over all of the property distributed, so none of the distribution is taxable.  To do this in TurboTax, you indicate that dollar amount rolled over was the dollar value of the shares as valued on the date of the distribution, not the dollar value of the share on the date of the rollover contribution, that the difference in share value is not included on Form 1040 line 4b or 5b.  Your tax return must then be printed and mailed along with your explanation statement saying that this was a rollover of the same shares that were distributed in-kind.

Taking into account the 0.001 share difference, I'll assume that the 0.001 share difference means that you rolled over 0.001 share less than was distributed since it's impermissible to roll over 0.001 share more than was distributed.  To calculate the exact dollar value rolled over, multiply the per-share value of the shares on the date of distribution by the number of shares actually rolled over.  If the per-share value was low enough on the date of distribution, the 0.001 share lower amount rolled over will still be the same dollar value when the dollar value is rounded to the nearest dollar.

As I think I said previously, there's a good chance that brokerage's cost-basis tracking of non-covered shares will be inaccurate, but since they don't report to the IRS the cost basis of the sale of non-covered shares, it's always your responsibility to track the cost basis of non-covered shares.  Your cost basis in non-covered shares ends up being unchanged by an in-kind distribution followed by a rollover of all of the same shares.

[dmertz · Accepted solution]

Here's an article I just found explaining all of this, written by a well-known and respected expert in the IRA industry.  It agrees with everything I have said above except that it suggests that you can sell an repurchase the shares outside of the retirement account and can then roll over the repurchased shares, which I generally disagree with due to the complications it causes with regard to cost basis of the shares outside the retirement account.  But we are in full agreement on the main point, that the distribution and rollover results in no recognizable gain or loss on the property rolled over:

https://www.kitces.com/blog/undo-rmd-unwanted-2020-cares-act-roll-back-deadline-august-31-same-prope...

[harveyak]

I exchanged messages with you yesterday about this.  I happened to read the article you mention this morning.  I finally got TurboTax to "behave' the way I wanted without mentioning RMD.  I was able to write a complete explaination in Turbotax.  Do you think I still need to send the return in on paper with the explaination up front?

[dmertz]

I'm not sure how you caused TurboTax to prompt you to prepare an explanation statement within your tax return, but if it's present in the pdf generated when you print just the forms needed for filing, it should be present in an e-filed tax return.  Just be prepared to provide explanation if the IRS questions why the Form 5498 reports less than than dollar amount that your tax return treats as rolled over.

[rolanddawson2500]

Sorry for my poor wording, I was trying to say it was identical to the .001 share. I will run it through the TT program as you suggest and see if it prints a pdf that needs to be filed. Wish I could convince the broker to show it as identical dollars on the IRS form, instead of showing the difference in timing. The article reference was very helpful.

[dmertz]

The broker is required to report the value it had on the date of the rollover contribution despite it being an in-kind rollover.  This is because the in-kind distribution that is eligible for rollover could have come from anywhere and the broker would have no knowledge of the value at the time of the distribution; the broker can't report a value based on hearsay.

[rolanddawson2500]

OK, hopefully my last question!!!! (And Thank you.) I ran it like you discussed, which gave a $0 taxable draw on my wife's IRA for 2020. However, it then dropped the 8606 tracker of the post tax (nondeductible) contributions (the 8606S form). My 8606T stayed, as I had another IRA that I stopped in march, but did not repay, so there was some withdrawals that were taxable and it prints the 8606T for this form. My question, will the 8606(S) reappear automatically  next year when we resume RMD's from both our brokerage accounts (the 8606T definitely will)? It is a complicated form (at least to me) and I would not want to have to reenter the data from many years past to reestablish it.