Incorrect rollover of a Qualified account into an IRA

[lspardun]

My wife's financial advisor mistakenly did a direct rollover (via check) into her (Non-Qualified) IRA of a distribution check from a Qualified investment fund in late 2020.  When we discovered the mistake, it was 2021.  The financial advisor transferred the money to another Qualified account, but these transactions caused the 2nd transfer to show as a distribution from the IRA, and we got a 1099R for that distribution for 2021.

How do we correct this mistake?  We will owe $1000's in taxes on the 1099R amount, which is not correct, as all taxes were always paid over the years on the Qualified investment account.  Can we just ignore the incorrect 1099R?

[DaveF1006]

To clarify, what was the distribution code in Code 7?

[lspardun]

coded as a 7 in box 7

[dmertz]

These are simply two separate rollovers, neither of which is taxable.  Both must be reported.  The first one will be included on Form 1040 line 5a and excluded from the taxable amount on line 5b with the word ROLLOVER next to this line.  The second one will be included on Form 1040 line 4a and excluded from the taxable amount on line 4b with the word ROLLOVER next to this line.  As nontaxable rollovers, these have on other effect on your tax return.

Also, an IRA is a type of qualified retirement account.

Code 7 indicates that the rollover was performed as an indirect rollover.

[ThomasM125]

I'm not sure exactly what you are referring to with the term "non-qualified IRA", but it seems to be reported as a normal distribution from an IRA. As such, when you roll it over to a similar IRA, you can designate it as such in TurboTax after you enter the 1099-R form. You will see a screen that says What Did You Do With The Money From (name of investment)? You will answer I moved this money to another retirement account and I rolled over all of this money to another traditional IRA or other retirement account. If you do that, it won't show as taxable on your tax return.

However, if the original transfer was from a qualified traditional IRA account in which the investment consisted of pre-tax contributions, the transfer to a non-qualified IRA would likely have been taxable. Sometimes such a trustee to trustee transfer won't be reported on a form 1099-R, but normally that would only occur if it was from a qualified plan to another qualified plan.

[lspardun]

Sorry for the delay in picking this thread up -

The initial deposit was from a post-tax mutual fund.  The trustee - trustee transfer was done in Aug 2020, without a tax form, as you say, but it was NOT between two Qualified plans.  That was the mistake.  It went from a taxable account into an IRA, which would have been an excess contribution.  The mistake was found in early 2021, and the financial advisor transferred the money (plus earnings) out of the IRA in Apr 2021 to a taxable account, as it should have been done in the first place.

The IRA custodian issued the 1099-R showing it as a taxable distribution, but it should have been a removal of excess contribution; as described in the TT help file:  "request to withdraw the excess contribution, plus earnings, by the due date of the return." 

Do we need to get the IRA custodian to issue a new 1099-R?  If I just try to change the 1099-R entry 2a Taxable Amount to $0.00, Turbotax gives me errors.  Thanks for your help with this...

[DaveF1006 · Accepted solution]

Yes, I would suggest that the IRA custodian issue you a corrected 1099R with a Code P in Box 7.

@lspardun

[lspardun]

Working on this, thanks for the help!