On my 1099-R, the wrong distribution code was entered for a 401k rollover. State taxes were withheld. How do I fix this?

[qwertyPolka]

They entered code "1" and should have entered code "G".  No federal taxes were taken out.  "Payer" was not really helpful on what to do.

[SusanY1]

You can contact the issuer and ask them to correct it, but that could take a lot of time, and often they aren't willing to do this.  However, since you will have other evidence that you rolled it over, there is another way to handle this within the TurboTax program that will give you the right result (your taxes back!) and allow you to resolve it quickly.  

1. Enter Form 1099-R exactly as it is issued.
2. After you have entered all of your forms in this section, continue to the follow-up questions. (Note: There are quite a lot of them.)
3. When you are asked, "What did you do with the money from This 1099" answer Rolled it over.

TurboTax will ask if you rolled it all over or just some of it.  Here you can indicate that you rolled it all over, and it will not be taxed.  This should result in a refund of your state withholding and no federal tax on your distribution.  

Keep your statement that shows the deposit or transfer into the new IRA for at least three (3) years.  Don't be alarmed if the IRS sends you a letter asking for it.  Computers, not people, handle most of the letters that go out when data doesn't match (like your code on the 1099-R and your tax return.)  If you get one of those letters, you will just reply with copies of your statements and it will resolve your issue.  Our free Audit Support Center can help you, should this occur.

[dmertz]

The code 1 is almost certainly correct.  Code G cannot be used with any Form 1099-R that shows tax withholding.  Code 1 is correct if the distribution was paid to you and you subsequently rolled the distribution over to another retirement account within 60 days.  Code G is only used for distributions paid directly from the original account to the receiving account without the money ever having been paid to you personally.

When you enter the code 1 Form 1099-R, indicate that you moved the money to another retirement account, then indicate the amount that was rolled over.  TurboTax will include the entire box 1 amount on Form 1040 line 4c but will exclude from line 4d the amount rolled over.  The word ROLLOVER will appear next to the line.

[jlopez93]

@dmertz I have a similar question. My girlfriend's dad passed away a year ago and since then she has been receiving monthly payments from CalPERS. She recently got 1099R with her name and SSN and we have been trying to complete her taxes on TurboTax but we are having difficulty. I think it might have to do with the distribution code on her 1099-R. 

The 1099-R form has a distribution code of 3 in box 7. I looked it up and code 3 means disability. I think it should be a code 4 because her dad passed away. We put the information in turbotax just as it was presented but I believe that code 3 is prompting further questions that she has no answers to. The questions are meant to be directed to her dad and not herself.

Do you think that the code is incorrect and if so how could we proceed?

[dmertz]

jlopez93, I agree, assuming that your girlfriend's father, not your girlfriend, was the employee participating in the CalPERS plan, this Form 1099-R should have code 4.  For this to still be an account in CalPERS, this was apparently being received as an annuity over the joint lifetimes of your girlfriend's father and your girlfriend and it is now paying out to your girlfriend as beneficiary.  Your girlfriend should contact CalPERS to obtain a correction to the Form 1099-R.

It's hard to imagine that CalPERS will not provide correction, but if they do not I would enter it as a substitute Form 1099-R (Form 4852) using the correct code 4 and provide the required explanation.  The taxable result would be the same if she used the code 3 and indicated that the youngest retirement age was some age younger than her age in 2019 (so that TurboTax does not treat it as wages paid to your girlfriend), but I think it would be better to indicate to the IRS that the Form 1099-R was filed using an incorrect code.  Filing a substitute Form 1099-R (Form 4852) will require mailing the tax return.

[ismith12182]

Hi @dmertz,

Similar question to the previous.

I attempted to perform a direct rollover (IRA to IRA) between two different institutions (a complete distribution), but each institution would not allow me to do so informing me I had to perform an indirect rollover. Though, when filling out the distribution form, I had the distribution check made payable to the second institution - so I never personally received any funds.

On my 1099-R, the distribution code is 1 [ Box 7], and $0 were withheld [4,14] and it states that the total amount of the distribution is taxable [2a]. This I believe is incorrect. In your previous post you had stated, "Code G is only used for distributions paid directly from the original account to the receiving account without the money ever having been paid to you personally" which I believe is my situation, though the Payer refuses to correct my 1099-R.

Any advice on how to proceed? Thanks.

(P.S. the distribution and transfers occurred during May 2021 during COVID).

[SamS1]

You can fix this in TurboTax.  Enter the 1099R as received.  After the uncommon situations screen you will be asked if you moved the money through a rollover into an IRA within 60 days.  Select that box and it will take through screens that will make the distribution show as a rollover on your 1040.  You should receive a form 5498 from your new IRA instiution sometime in May showing he rollover to the new IRA.  This will be report to the IRS.

[dmertz]

If this original and new accounts were truly IRAs, it's rather improper that they did not permit a nonreportable trustee-to-trustee transfer (not a direct rollover), unless you placed some sort of time limit on completing the process.  The term "direct rollover" only applies to the movement of funds between retirement accounts when either the original account or the destination account (or both) is an account in a qualified retirement plan (i.e., 401(k), 403(b), 457(b) or the federal TSP).  IRA custodians who will not accommodate a trustee-to-trustee transfer are shameful and should be avoided as a matter of principle.

A proper trustee-to-trustee transfer done in the form of a check has the check made out to the receiving IRA account for your benefit, not just to the financial institution for your benefit.  If the check is just made out to the financial institution for your benefit, you and the financial institution are free to deposit the check into any kind of account for your benefit, not just the same type of account from which the funds were taken.  Technically that brings the funds under your control and precludes this from being a proper trustee-to-trustee transfer.

In your case the distribution was reported as a distribution from a traditional IRA, indicated by the fact that no taxes were withheld.  (Rollover-eligible distributions from qualified retirement plans like a 401(k) are required to have a minimum of 20% withheld for federal taxes.)  As a distribution, to make it nontaxable it must be reported as rolled over as SamS1 described.

The only problem with having to treat this as a distribution and rollover between IRAs is the one-rollover-per-12-months limitation.  This rollover was not permitted if you did another IRA-to-IRA rollover in the period beginning one year prior to the date of this distribution and it prevents you from doing another such rollover in the one-year period following the date of this distribution.  That's why you want to do nonreportable trustee-to-trustee transfers.

[erikrockefeller]

Similar to this, my wife left her company and we rolled over her 401k to a new Traditional IRA. The prior company's plan administrator wrote after the rollover stating that a portion was not eligible for rollover because it was a corrective distribution (the employer failed the IRS ADP test). To ensure that we did not mishandle the taxes, we withdrew the amount that the company indicated and put it in a non-retirement brokerage account (a taxable event). Now the company's plan administrator has issued a 1099-R not for the entire rollover amount but for the amount less the corrective distribution. So we are essentially paying taxes twice. When trying to follow the steps in this thread, I do not get a prompt for other options. Should I select the box that we are going to prepare a substitute 1099-R?

[dmertz]

erikrockefeller, it appears that you might not have requested the correct type of distribution from the traditional IRA.  The money that was rolled over to the traditional IRA that was not eligible to have been rolled over constituted an excess contribution to the traditional IRA that needed to be removed by a return of contribution, not by a regular distribution.  With a proper return of contribution, only any gains attributable to the distribution being returned would be taxable.  Box 1 would show the amount returned plus gains and box 2a would show just the gains.

What is the code in box 7 of the Form 1099-R reporting the distribution from the traditional IRA?

Is the amount in box 2a different from the amount in box 1?

In what year was the rollover deposited into the traditional IRA?

[erikrockefeller]

@dmertzthanks for your help.

box 7 contains both codes 1 and 8 so I believe it was done correctly. Box 2a was empty (there was a loss between the rollover and the distribution). The rollover was deposited in 2020.

[dmertz]

Then you did the return of contribution correctly and you are not paying taxes twice since the taxable amount in box 2a of the Form 1099-R from the traditional IRA is zero.

In addition to the 401(k) issuing a Form 1099-R reporting the amount that was eligible for rollover, they should also have issued a code-8 Form 1099-R for the portion that was the excess elective deferral and was subject to tax, the only amount that is taxable, taxable because it was excluded from box 1 of your W-2.  You enter all of these forms 1099-R with the result being that Form 1040 line 4b should include none of these distributions and line 5b should include only the amount from the code 8 Form 1099-R from the 401(k).

[mrhalh]

I have a related question. I received a settlement check for a 401k class action lawsuit. Since I  didn't know the amount of my shoe of the settlement ( I assumed it was small. am now retired I took the total distribution. I received the check and put it in savings account. I received a 1099R with a Distribution code of 1, early distribution. I am 67 years old.  I don't believe I should pay a 10% penalty.  I think the 1099R should be corrected. Do you agree?

[dmertz]

Yes, I agree that because you are over age 59½ the Form 1099-R should have had code 7, not code 1, and that the distribution is not subject to any early-distribution penalty.  For that reason you can claim an Other reason (code 12) exception on line 2 of Form 5329, eliminating the penalty.

[greybirds2]

I have the same situation: in 2021 I requested that IRAs held at 3 different institutions - I'll call them X, Y, and Z - be sent as to a new custodian. I called X, Y and Z for instructions on how to proceed with trustee-to-trustee transfers so I wouldn't run afoul of the 1 rollover per 12 months limit.

The forms available from X and Y both had mention of the 1 rollover limit so I was very leery, but agents at both assured me that having the checks sent directly to the new custodian would keep me out of trouble. I submitted the requests; checks were sent to and deposited by the new custodian into the IRA I have there.

Institution Z said they could only do the indirect rollover. Since X and Y did trustee-to-trustee transfers - or so I believed - and I hadn't done any other rollovers recently, I proceeded, thinking all was well, happy that all my accounts were finally consolidated with a single trustee.

My bliss was shattered when I received 1099-Rs from X and Y; since these were supposed to be non-reportable trustee-to-trustee transfers, I didn't expect them. After several conversations with both X and Y -   

- X agreed that I was correct: it WAS a non-reportable event, and they eventually issued a 1099-R that was zeroed out (no entries for amounts and codes).

- Y said no, it was a rollover since they had no way of knowing the receiving custodian actually deposited it into a qualified account. They did say the 5498 would not show this amount on Line 2 if the receiver deemed it a trustee-to-trustee transfer.

As expected, I received a 1099-R from Z.  It was confusing due to a separate disbursement made during 2021 but workable.

I was leaving on a long trip in early April so I stupidly filed my return using the information from the 1099-Rs that I'd received. In retrospect I should have filed an extension and gotten EXPERT help on filing when I returned but too late now.

I got a refund within 2 weeks but have been worried that in time the IRS will come after me about exceeding the rollover limitation, especially since when I finally got the 5498 it had the amounts from all 3 transactions on Line 2. The new custodian didn't seem interested in changing the 5498 to reflect only the rollover from Z, which is what I expected it would be.  They and  2 different tax advisors who I had look at my return  said if the IRS did question it I should be able to prove I was not in violation, but I don't want to wait and worry for 3 years to find out they're wrong and and owe a pile of penalties and interest. 

Do you think I'm in trouble with this?  I am trying to engage an expert, IRS Enrolled Agent advisor but they're all on limited staffing right now.