If you requested distributions from your IRA, your IRA custodian may send you a Form 1099-R by January 31. While that is to be expected for distributions you requested, sometimes individuals also receive a 1099-R for transactions they thought would not be reported. Or, sometimes IRA holders don't receive a 1099-R for transactions that should be reported. These incidents can be the result of incorrect instructions or miscommunication between IRA owner and custodian, resulting in erroneous 1099-R reporting. Here is an overview of transactions which often cause this confusion. (For some background reading on retirement savings, see How Much To Save To Become A Millionaire.)
1. Transfer of One IRA to an IRA of the Same Type
If you moved your IRA from one custodian to another, or between two IRAs at the same custodian with a trustee-to-trustee transfer, you should not receive a Form 1099-R. If you receive the form anyway, you may have provided the wrong type of instructions to your IRA custodian. Check with your IRA custodian for a copy of the instructions you completed. If you signed a request for a non-reportable, trustee-to-trustee transfer, ask your custodian to issue to you and the IRS a corrected Form 1099-R showing that the amount should not have been reported. If, on the other hand, you signed a distribution (not transfer) request, then you may need to take the following steps:
- Check with the receiving custodian to see if the amount was treated as a rollover contribution to your receiving IRA. If it was, the rollover will be reported on IRS Form 5498, letting the IRS know that the amount reported on the Form 1099-R is not taxable, even if the 1099-R reflects it as such. (See IRA Year-End Statements.)
Check to see if, during the 12-month period preceding the transaction, you rolled over a distribution from the same IRA. If you did, the rollover may be ineligible because you are allowed only one rollover per IRA during a 12-month period. If it is ineligible it is subject to correction through a return of excess contributions. (To learn more, see An Introduction To Ineligible IRA Contributions.).
Report the amount on your tax return as not taxable (assuming you are eligible for the rollover - see above). This is done by including the amount on line 15a of you IRS Form 1040 (tax return), and then indicating zero on line 15b.
Tip: If you want to transfer your IRA, contact the new custodian to initiate the transfer. Also, ask as many questions as necessary to feel confident that you are completing the correct paperwork. In most instances, transactions that were intended to be transfers were processed as distributions because the IRA owner was presented with the wrong type of paperwork.
2. Transfer of a SIMPLE IRA to a Traditional IRA
SIMPLE IRA assets can be transferred to another SIMPLE IRA only if at least two years have passed since the first contribution was deposited to the SIMPLE IRA. If you transfer your SIMPLE IRA assets to a non-SIMPLE IRA plan before the two-year holding period, your IRA custodian may report the transaction as a distribution on IRS Form 1099-R. This is likely to result in adverse consequences: since the amount is not rollover eligible, it would be treated as an ineligible contribution to the receiving account. If you transferred your SIMPLE IRA to a non-SIMPLE IRA plan before the end of the two-year holding period, the following rules apply:
- The transaction is treated as a distribution for tax purposes. Generally, this means that you must include the amount in your income for the year the transaction occurred. If you were under age 59.5 when the transaction occurred, the amount will be subject to a 25% excise tax (early-distribution penalty). This penalty is usually 10%; however, it is increased to 25% if the distribution occurs from the SIMPLE before the two-year period.
The credit to the receiving IRA should be treated as a regular IRA contribution, which is subject to the annual contribution limit ($5,500 for 2013, plus a catch-up contribution of $1,000 for each year). If you already made an IRA contribution for the year, the credit to the receiving IRA may push your contributions over the limit, causing excess IRA contributions.
Tip: If it has been less than 60 days since the transaction occurred, you may withdraw the amount from the receiving IRA as a return of excess (return of ineligible contribution) and roll over the principal amount to the SIMPLE IRA. If you are eligible to use this option, contact both custodians to ensure the transaction is reported as a distribution from the SIMPLE IRA and a rollover contribution to your receiving IRA. The return of excess will negate the credit to the IRA and the rollover contribution will offset the distribution from the SIMPLE.
3. Transfer Due to Divorce
If you transferred part or all of your IRA assets to your spouse or former spouse (referred to hereinafter simply as "spouse") as fulfillment of the terms of a divorce decree or legal separation agreement, any distribution of the amount awarded to your spouse must be reported on Form 1099-R under his or her name and tax identification number. This means that if the amount is taxable, your spouse pays any taxes owed on the amount.
Tip: If your spouse is entitled to receive your IRA assets as part of a divorce settlement, be sure to check with your IRA custodian about its operational and documentation requirements. Since you are already required to give up the assets, you probably do not want to pay taxes on the amount. Providing the proper documentation helps to ensure that the right party pays any applicable taxes. (To learn more, read Getting A Divorce? Understand The Rules Of Dividing Plan Assets.)
Even if your IRA distributions over the last year were not intended for reportable purposes, the amount shown on your 1099-R may be deemed taxable by the form issuer. As such, actions must be taken so that the form reflects the proper tax treatment on your tax return. (Again, see IRA Year-End Statements.)
When discussing IRA transactions with your custodian or financial representative, be sure to discuss the tax-reporting implications of the transaction. Most tax-reporting errors occur because of submission of incorrect request forms or a misunderstanding between the IRA owner and the financial representative. Also, be sure to check your account statement to ensure transactions were processed in accordance with your instructions. You may be able to have processing errors corrected if the error is detected early.