Since I completed a Like-Kind, Full account transfer from one Beneficiary IRA custodian to another Beneficiary IRA custodian, does that mean that next January, I will receive a 1099 to demonstrate that there was a "distribution"?
However, I assume that my new Beneficiary IRA custodian will not have a 5498 to send to the IRS right? Then, how will I document that I indeed only "transferred" the equities and didn't "cash out" anything?
What do I need to do differently on my 2021 tax return so that they will NOT have to send me a CP2000 for the fact that my old Beneficiary IRA send them a 1099 that shows "distribution"? Will I need to include/ input anything in my taxes manually so that I can avoid the government asking me about this "distribution" later on, and whether or not I really "sent"/ transferred it to another account?
I just want to make sure I send in all the necessary information on my 2021 taxes so that I can avoid issues / problems in the future. Any and all help and advice would be greatly appreciated!
A trustee-to-transfer of an IRA is a nonreportable transaction. Since movement of one beneficiary IRA to another can only be done by such a nonreportable transfer, receipt of a Form 1099-R for this would imply that what was done was instead a distribution and rollover to the beneficiary IRA, which is not permitted. You should also not receive an Form 5498 reporting any kind of contribution. There is nothing to report on your 2021 tax return regarding a proper transfer of the beneficiary IRA.
@dmertz Ah okay! Thank you so much for your help!
Then how come when I rollover my old 401k custodian to a Rollover IRA, then it's reportable? (1099 from old 401k custodian; and a 5498 from my IRA custodian)
Similarly, how come when I rollover my old 401k custodian to a new 401k custodian, it's reportable? (1099 from old 401k custodian, and I'm assuming I'm going to get a CP2000 soon so that the IRS can ask me to send me my new 401k's account statement to show that I indeed rolled over the money instead of cashing it out)
I'm assuming that a Like-Kind, Full account transfer from a old Beneficiary IRA custodian to a new Beneficiary IRA custodian would be similar to the situations above, no? Sorry I'm just a little confused.
Unlike movement of a 401(k), because you rather than plan administrator is in control of the IRA, movement of a traditional IRA by trustee-to-trustee transfer is treated the same as a change of investment within an IRA. Movement of a 401(k), however, moves the funds entirely out of the control of the 401(k) plan administrator, so it is a distribution.
Movement of funds from the 401(k) of one employer to the 401(k) of a different employer changes the plan that controls the funds, so it constitutes a reportable distribution and rollover. However, because 401(k) plans to not report to the IRA receipt of rollovers, without an explanation statement to say that the rollover was completed to another 401(k), the IRS has no documentation to corroborate that the rollover was actually completed, so they tend to question it to ensure that the rollover was truly completed. In the case of a rollover to an IRA, though, the Form 5498 reporting receipt of a rollover contribution suffices.
Regarding nonreportable trustee-to-trustee transfers of IRAs, see IRS Revenue Ruling 78-406, 1978-2 C.B. 157. Note that the "three year period" mentioned was later changed to one year in an update to the tax code:
Revenue Ruling 78-406
Internal Revenue Service
1978-2 C.B. 157
Section 408.-Individual Retirement Accounts
Individual retirement account; transfer of funds to new trustee. A transfer of a participant's individual retirement account funds from one trustee bank to another that occurs within the three year period following a rollover contribution within the meaning of section 408(d)(3) of the Code, but involves no payment or distribution of the funds to the participant, is not another rollover contribution and does not result in a distribution includible in the gross income of the participant.
Rev. Rul. 78-406
Advice has been requested whether a transfer of the funds in a participant's individual retirement account (IRA), established under section 408 of the Internal Revenue Code of 1954, from the IRA trustee to a new IRA trustee results in a distribution includible in the gross income of the participant.
In 1975, the participant established an IRA at bank X. In 1976, the entire amount in the IRA was distributed to the individual and rolled over to another IRA at bank Y pursuant to section 408(d)(3) of the Code. In 1977, bank Y transferred the funds in the participant's IRA to a new trustee at bank Z.
Section 408(d)(1) of the Code, added by the Employee Retirement Income Security Act of 1974 [1974-3 C.B. 1, 54] provides that, in general, any amount paid or distributed out of an individual retirement account or under an individual retirement annuity (collectively referred to as IRA) shall be included in gross income by the payee or distributee for the taxable year in which the payment or distribution is received. Section 408(d)(3)(A)(i) of the Code, however, provides that such amount is not includible in the gross income of the individual for whose benefit the account is maintained if the entire amount received (as described in section 408(d)(3)(A)(i)) is paid into another IRA (including a retirement bond) for the benefit of such individual not later than 60 days after receipt of the payment or distribution (a rollover contribution). Section 408(d)(3)(B) limits the frequency of such rollovers to once every three years.
In the instant case, the participant's rollover contribution to bank Y in 1976 would prevent any additional rollover contributions during the three year period described in section 408(d)(3)(B) of the Code. However, the transfer of the IRA funds in 1977 between trustee banks Y and Z did not result in such funds being paid or distributed to the participant. In the absence of payment or distribution, the transfer would not be a rollover contribution described in section 408(d)(3)(A) because such funds are not within the direct control and use of the participant. This conclusion would apply whether the bank trustee initiates or the IRA participant directs the transfer of funds.
Accordingly, the transfer of the IRA from trustee bank Y to trustee bank Z did not result in a payment or distribution includible in the gross incomes of the participant.
While this Revenue Ruling refers to what is now the one-rollover-per-12-months limitation for IRA owners to roll over distributions, it also applies to beneficiaries of IRAs because beneficiaries of IRA are never permitted to move a beneficiary IRA by distribution and rollover. However, plans like a 401(k) that are inherited are permitted by the tax code to be moved to an inherited/beneficiary IRA by a rollover, provided that the rollover is made directly between the plan and the inherited/beneficiary IRA. It comes down to differences in the tax code regarding these two different types of retirement accounts.
@dmertz Ah okay! Thanks so much!
So given that I completed a rollover (in 2020) from my old 401k custodian to my new 401k custodian, and forgot to input the 1099 from the old 401k custodian to my 2020 taxes, do I HAVE to file an amended tax return?
What if I don't? Will the IRS come get me?
Can I just not file an amended tax return and wait for the CP2000 to arrive and that's when I can send them my new 401k custodian's statement that says that I've indeed rolled it over?
Assuming that the code in box 7 of the Form 1099-R for the distribution from the old 401(k) is code G and the taxable amount in box 2a is zero, there would be no change that would be reportable in the numbers on the Form 1040-X. The only thing filing an amendment would do is allow you to provide explanation that the rollover was truly completed in the hope that doing so would preempt an IRS query. You can provide the same explanation if the IRS questions the 401(k) rollover, so it might just be simpler to wait for the IRS to flag the missing information rather than amend. The end result will be the same if the IRS never questions this rollover or the IRS questions it and you subsequently provide the IRS with the information to satisfy them that the rollover was completed.