Rev. Proc. 2020-46 self certifying letter

[eastcobb09]

Hi, I need to fill out the above, as I accidentally transferred my money to the wrong account.   Do I send this to the IRS via mail, or can I file electronically?

My broker is asking for a copy as well. 

Do I need to send any other accompanying documentation to the IRS?

Lastly...my understanding is I should pay the early withdrawal penalty upfront, in order to get a refund of that penalty.  Is that correct?  That is, I need to "rollover the entire amount" i Turbotax.

Pls advise if I'm doing things the right way here?  I'm having a very hard time finding someone with experience regarding 2020-46. Thank you.

[dmertz · Accepted solution]

You provide the self-certification to the IRA custodian (your broker?).  It's what allows them to accept a rollover after the 60-day rollover deadline has passed.  It is not to be provided to the IRS unless the IRS asks for a copy.

"Lastly...my understanding is I should pay the early withdrawal penalty upfront, in order to get a refund of that penalty.  Is that correct?  That is, I need to "rollover the entire amount" in TurboTax."

If in TurboTax you indicate that the entire distribution was rolled over (which you will do if you complete the rollover of the entire distribution under Rev Proc 2020-46), there will be no early-distribution penalty to pay up front and no penalty to refund.

[eastcobb09]

Dmertz, much thx for your kind response.  Very happy to come across someone with your expertise in this matter.   To piggyback off this, I have 10% of the distribution being withheld as federal tax.  As such, to "get that back", my understanding is I need to pay this same amount from my own funds, back to the IRA custodian.   That is box 4 from the 1099R.

On my 1099 R,  box 1,  is the full amount to be rolled over.    Once I agree within Turbo Tax to rollover the full amount to a proper IRA,  my refund will show me getting back the 10% I had to pay out of my own pocket to the custodian.   

Seems strange to me......pay the 10%....only to see the 10% returned to me a few weeks later as a refund.   But if that is what the 1099 in Turbo tells me to do, I'll do it...?

Thoughts?

[dmertz]

Tax withholding does not specifically apply to any particular portion of your tax liability, it is credited against your overall tax liability.  It just so happens that the default tax withholding on an IRA distribution is the same percentage that Congress chose as the percentage excise tax on an early distribution, but that doesn't mean that the 10% withheld for taxes is the early-distribution penalty.

Once the IRS has the money that was withheld for taxes, the only way to get back anything is to file a tax return showing that your overall tax liability for the year is less than the amount that you paid the IRS in tax withholding and estimated taxes.  The reason that your tax liability was less than the amount paid in tax withholding and estimated taxes is irrelevant.

[eastcobb09]

Thx dMertz....it so happens my custodian has told me today I do not have to pay the 10% penalty from my own fund, rather, they will handle that.   My issue is  I still have a potential tax liability of $22k, due to this 1099-R, showing on my Turbo Tax 1040. 

Not sure how them handling that will lower my bill in Turbo Tax?  I guess that will count the same as a full rollover, which will do the trick.    

I do have another question for you, related to this, if you don't mind.  I'd really like your POV.  

When I mistakenly moved my Roth IRA fund to a non IRA fund, it triggered both a longterm and short term capital gain.   This mistaken transfer was in Nov and led to my self cert letter.   The plan is to move these funds from the wrong non IRA account back to a Roth IRA account with my custodian.   I am not 59 and a half.

Will I still have to pay taxes on these capital gains?   I've received two different points of view.   The custodian says "yes" I will.  Another tax expert say "no" I should not have to, as I have paid taxes on the Roth already.  

As I want to move these funds back to a ROTH, I am hoping I do not have to.......Pls advise your thoughts here?

Much thx, dMertz....

[dmertz]

"it so happens my custodian has told me today I do not have to pay the 10% penalty from my own fund, rather, they will handle that."

If you roll over the entire gross amount, there is no penalty.  I can't imagine what they are going to "handle."  All they need to do is accept the rollover of whatever amount gets deposited into the traditional IRA as a rollover contribution.

When entering the Form 1099-R into TurboTax, you will tell TurboTax the amount that was (will be) rolled over and TurboTax will exclude this amount from the amount of taxable income shown on Form 1040 line 4b and will mark the box to indicate a rollover.

I'm now quite confused about what the mistaken transaction was and the type of account from which the distribution was made.  If there was an in-kind distribution of shares from a Roth IRA, there would have been no cash to withhold for taxes.  If the distribution was instead a cash distribution, there would have been no capital gains.  Only if there was a distribution of a combination of cash and shares could you have both tax withholding and capital gains.

If there was an in-kind distribution was from a Roth IRA, you are not permitted to sell the shares and roll over the proceeds.  Only if the distribution was from a designated Roth account in an employer plan are you permitted to do that.

What is the code in box 7 of the Form 1099-R?

Is the IRA/SEP/SIMPLE box marked?

[eastcobb09]

dMertz...you have answered the first half of my question quite clearly.  Thx for that.

Regarding the second half, sorry for the confusion.  Box 7 is "J".   The IRA, SEP or SIMPLE box is "no". 

The custodian told me J indicates I transferred from a Roth IRA to a  non IRA. (I hope my understanding is correct?)   

This is what the custodian sent me yesterday,

"To confirm, the redemption of assets will be coming out of the individual account and be
returned to a Roth IRA, which will be your requested Equity mutual fund. Taxes on the short-
term and long-term gains will be paid in 2027.   

Keep in mind that because these transactions will occur in tax year 2026, they will appear on
tax forms generated in 2027. You will receive IRS Forms 1099 for the gains that will happen
from the distribution from your individual account. You will also receive IRS Form 5498 for the
contribution to pair with all the documents for the self-certified rollover. You will also receive
confirmation of the contributions.

Please note that these amounts will affect your 2026 taxes; however, each type of transaction
affects differently so it may not necessarily affect your income. "

dMertz,  I'm not clear what is triggering these capital gains as original acct was a  ROTH.   Are they saying when I move it back to a ROTH, I will trigger those gains?   My goal here is to NOT have to pay any capital gains, esp after the penalty is resolved.   Pls help me understand.   As it's a ROTH, I've obviously already paid taxes.   Thx, dMertz.

[dmertz]

Code J simply indicates that a distribution was paid to you from a Roth IRA before you reached age 59½.  It says nothing about what you did with what was distributed.  Had the asset been transferred directly to another Roth IRA by the original Roth IRA custodian, there would have been nothing to report, no Form 1099-R at all.

It's still not clear to me exactly what was distributed from the original Roth IRA.  If it was cash and then that cash was used to purchase a capital investment outside of a Roth IRA, I don't think that you could justify self-certifying that you would qualify for a waiver of the 60-day rollover deadline.  The only listed reason might seem to apply  is that the distribution was deposited into an remained in an account that the taxpayer mistakenly thought was an eligible retirement plan, but using the cash for buying and selling something outside of a Roth IRA typically disqualifies one from getting a waiver of the rollover deadline.

If the distribution from the original Roth IRA was instead an in-kind distribution of, say, shares of a mutual fund, those shares while outside of a Roth IRA could produce dividend and capital gains distributions that would be reported on a Form 1099-DIV.  In that case, the shares and the resulting distribution would have to be rolled over together to the new Roth IRA.  Because the Form 1099-DIV was in your name, it would have to be reported on your tax return but then subtracted back out using the nominee process.  Still, the fact that there were taxes withheld doesn't square with a distribution that was entirely an in-kind distribution.  For there to have been tax withholding, the distribution had to include at least as much cash as was withheld for taxes; taxes are paid in cash.

If you received a Form 1099-B, that creates a somewhat different scenario, one that likely precludes you from rolling over the distribution from the original Roth IRA.