Bank coded my IRA transfer as distribution, not transfer. Help!

[smolinskijj]

Hello, longtime turbotax user here but first-time poster.  My situation sounds similar to the thread here but I am not sure if it is exactly the same.  Bear with me.

In summer 2022 we began consolidating some older retirement funds into 1 location.  I moved some funds successfully from "V" into a new IRA with "E".  My wife moved an old IRA with "T" to a new IRA with "E".  It is my wife's IRA that I am writing.

Having never transferred an IRA to another entity before this summer, we made sure to communicate with both "E" and "T" about what was needed. She went to bank "T" a week prior and asked them what was needed.  Then, we spoke with bank "E" to verify the details. We were instructed to go to "R", inform them of our intent to transfer to another IRA, and we would receive the full IRA amount as a check “made out to E for the benefit of my wife”, and would go literally across the street and hand it to "E" for deposit into her new IRA.

I recall us sitting there for some time as the "T" banker struggled to get the process correct. At some point the branch manager took over and got us the check in just a couple of minutes and we promptly brought it over to "E".

Fast forward to January 2023. I am tracking tax documents as they come in the mail. I noticed my wife’s paperwork, as described in the explanation above, seemed odd. Taxes were withheld from the transfer totaling 10%!  

• Specifically, she received a 1099R with the full IRA amount in box 1, the same amount listed as taxable income in 2a. 
• 2B shows both boxes checked (taxable amount not determined, total distribution)
• Federal tax withheld in box 4 is the 10%
• Box 7 says distribution code: 1 (total distribution, IRA box is checked) but it believe it should have been G like the IRA I successfully transferred myself.

I looked back at the receipts from the summer and noticed that yes, in fact, 10% of the value of the IRA was withheld (totaling about $1500). How we did not notice this then I do not know, other than this was a new process for us.  And I am a dummy.

We met with the same branch manager the other day, and all he could tell was that the first banker to work with us initiated a withdrawal, not a transfer. When we actually completed the transfer with the branch manager’s help in July, the check was written as we intended, as an IRA to IRA transfer to "E", but because it was initially coded as a withdrawal the taxes were withheld anyway.

We are now a week since raising the concern with the branch manager, who says he is working to find a solution that “minimally impacts us”.

* Because it was processed incorrectly, is the value of the IRA transfer check counting against us as “income” for 2022?

* what is a possible solution to 1) recoup the missing 10% and 2) correct the tax form prior to me filing for this year?

This is compounded by the fact that we are trying to file our taxes quickly because our financial aid application for our children’s tuition (due next month) requires the latest tax filing, which I cannot do until this is resolved.

Again, thank you for your patience and anything you can offer to improve my understanding of the situation.

[leeloo]

The 1099-R is correct. Only a trustee to trustee transfer gets code G. You have to manually indicate the rollover. As you proceed through the 1099-R interview, you will encounter a screen asking what you did with the distribution. Indicate that your rolled it over within 60 days.

You will get the withholding applied to your refund. 

[VolvoGirl]

When you deposited it in the new account did you add back in the $1500 10%?  If not the 1,500 is a distribution and taxable and the 10% Early Withdrawal Penalty if she was not 59 1/2.  So when it asks what you did with it only enter the actual amount put in the new account.

[MarilynG1]

Here's how to indicate that you rolled over your 1099-R distribution in TurboTax:

1. Search for 1099-R and select the Jump to link in the search results
2. Continue through the screens to import or enter your 1099-R form
3. When asked Tell us if you moved the money through a rollover or conversion select I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days) and select Continue
4. On the next screen, Did you roll over all of this (Box 1) to another retirement account? answer Yes, I rolled over to an IRA or other retirement account (or returned it to the same account) and select Continue

If taxes were withheld in box 4 of your form, they'll either be added to your refund or applied to your tax liability.

[VolvoGirl]

The 10% tax withholding will be credited on line 25b with all your other withholding like from W2s.  

[dmertz]

"T"  messed up and processed a distribution, not a trustee-to-trustee transfer despite what appears to have been a proper request to do a trustee-to-trustee transfer and having prepared the check appropriately (although it would have been more proper to have the check made out specifically to the receiving IRA).

If this had been done as a trustee-to-trustee transfer of a traditional IRA to another traditional IRA, no Form 1099-R should have been issued and no taxes should have been withheld.  (Code G is never to be used for  the movement of funds between IRAs.)

Because taxes were withheld, it would be difficult to treat get the reporting corrected to show that only the 10% withheld for taxes was the gross amount distributed.  Of course this makes your wife subject to the one-rollover per 12-months limitation, so hopefully she rolled over no other IRA distributions in the one-year period ending on the date of this distribution and will not do so in the one year period beginning on the date of this distribution.

I would approach "E" (or any other IRA custodian, even back to "T" if they are willing to help correct theire mistake) to see if they will accept your wife's certification under IRS Rev. Proc. 2016-47 as modified by Rev. Proc. 2020-46 that rolling over the 10% withheld for taxes would qualify for a waiver of the 60-day rollover deadline due to financial-institution error and allow her to complete the rollover of the entire gross amount.  That way the early-distribution penalty would be avoided and taxes would continue to be deferred on the amount that was  withheld.  Rolling over an amount equal to the tax withholding would still be a rollover of a single distribution and would not violate the one-rollover-per-12-months limitation.

Whatever the result with the Form 1099-R, you'll need to report whatever portion of gross amount that ultimately made it to the new IRA as having been rolled over.

With potentially serious mistakes like this, perhaps it is good that your wife has moved the IRA from "T".

[smolinskijj]

Leeloo (nice reference by the way).

I am reading your response, thank you, but I’m confused about one thing.

for the sake of simplicity I will round numbers.

let’s say original IRA had $15,000.   Let’s say the amount issued through the check was $13,500. (Original amount -10%).  Which for some admittedly idiotic reason we did not catch through this process.

am I understanding correctly, that the $1500 (10%) Will be credited back by correctly answering the rollover questions? Or is that money gone?

Thank you for your patience in trying to understand.

[leeloo]

Yes, you will indicate the $13,500 was the distribution and then that it was rolled over. Since the income is no longer taxable income, you will have paid in a penalty that no longer applies. It will be lumped in with all your withholding. Since you no longer have the income, you "should" get it all back, assuming there is no other income that is counted against it.

Edited 2/14/2023

[dmertz]

Unless your wife substituted other funds to replace the $1,500 withheld for taxes so as to deposit the entire $15,000 distribution into the new IRA, and I haven't seen anything to suggest that she did, your wife only rolled over $13,500 of the $15,000 distributed.  In my previous post I described the method by which your wife might be able to complete the rollover of the remaining $1,500 even though it might be beyond the 60-day rollover deadline.

[smolinskijj]

Hi @MarilynG1 ,

I have a question about this line in your answer:

"On the next screen, Did you roll over all of this (Box 1) to another retirement account? answer Yes, I rolled over to an IRA or other retirement account (or returned it to the same account) and select Continue "

What happened was they withheld 10%, so out of the original ~$15,000, only ~$13,500 was rolled over.  To clarify, you say to still answer Yes?  (I currently have it checked as "No, _____ rolled over less than $15,000".

Thank you for clarifying for a dumdum like me!

[VolvoGirl]

You say Yes you rolled it over.  Then it will ask you how much you put back.  That will leave the 1500 as taxable.

[smolinskijj]

@VolvoGirl 

So I get this:

Good news! You don’t owe taxes on your rollover

You won't have to pay taxes on your 14,358.63 rollover from Truist Bank.

Since Jessica rolled the entire amount to another retirement account, you don't have to pay taxes on it. This is because you didn't actually pocket the money, but kept it within a qualified retirement account.

Certain withdrawals can be rolled over tax free if it’s done within a specific timeframe, normally 60 days.

If any money was withheld from this distribution, we'll take that into account in your overall tax return.

Is the part in bold the part you're referring to?

[LindaS5247]

Yes, this is correct and what you want to see.  It sounds like your IRA distribution has been properly reported in TurboTax and not being taxed, as it was indeed a timely rollover.  

A "1" in Box 7 generally means that a 10% early withdrawal tax penalty was withheld because the recipient was under 59 1/2.  Since, per the above, this distribution was timely rolled over to another IRA, the penalty will not apply. 

As per VolvoGirl, your withholding of "$1,500", shown in Box 4, will either be added to your refund or applied to your tax liability.

You can view your entire return or just your 1040 form before you e-file to make sure these entries were properly reported:

1. Sign in to your TurboTax account
2. Open or continue your return
3. Select Tax Tools from the menu (if you don't see this, select the menu icon in the upper-left corner)
4. With the Tax Tools menu open, you can then:
   • Preview your entire return: Select Print Center and then Print, save or preview this year's return (you may be asked to register or pay first)
   • View only your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu

Click here for information on how to preview your Form 1040 before filing.

Click here for the Form 1040 Instructions.  See instructions for line 4a and 4b.

If this does not resolve your issue please feel free to contact us again.

[smolinskijj]

@LindaS5247  Thank you for your time.  I really appreciate it.

Can you clarify this?  

Does the amount withdrawn (the ~13,500 from the original ~15,000) "count as income" and thus potentially affect our tax bracket, etc?  Example, if our combined income were 80,000, would our income now be considered 93,500 and affect our AGI?  Or am I way off on assuming that?  Thank you.

[leeloo]

@smolinskijj 

Let's take this step by step.

1) You received a 1099-R with $15,000 income in box 1 and withholding of $1,500 which is 10% penalty for early distribution. The fix was to indicate the rollover, thus making it non-taxable. Only you could only roll over $13,500 because of the $1,500 was sent to the IRS and was not yours to roll over.

2) You now have $1,500 (withholding not rolled over) taxable income.  You also have $1,500 added to tthe entire amount of withholding. 

3) if your income was $80,000 it would now be $81,500, assuming you handled the rollover correctly.