Finding Answers to Commonly Asked IRA Questions

Finding Answers to Commonly Asked IRA Questions

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Learning Objectives

• Review commonly asked IRA questions

• Learn about the resources available to find answers

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Question

I reviewed my quarterly statement and noticed the contribution I made on April 8, 2021, was listed as a current-year contribution. I wanted it to be for the prior year.

Will you change the year so the contribution is reported for the prior year?

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Answer

I’ll review the paperwork that was completed at the time of the contribution. If it shows that you indicated a prior-year contribution, then I’m able to correct the contribution as being for the prior year.

If the paperwork doesn’t indicate the prior year, I’m not able to correct the contribution.

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Resource

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According to IRS Publication 590-A, contributions made between January 1 and the tax return deadline should be allocated either to the current year or to the prior year. Without direction, we assume—and report—that the contribution is for the current year.

Question

My twin daughters were born earlier this year and my savings account has taken quite a hit after paying medical bills and purchasing all the baby supplies.

I’ve heard that there is a tax-free distribution available from an IRA to help pay for some of these expenses. Is it too late to take a distribution for this reason?

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Answer

The SECURE Act allows individuals to take distributions of up to $5,000 per qualified birth and adoption to cover expenses. Although this distribution may still be taxable to you, it does avoid the 10% early distribution penalty tax.

As long as you take the distribution within one year of the birth of your daughters, it will be penalty-tax free.

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Resource

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According to IRS Notice 2020-68, a qualified birth or adoption distribution is includible in gross income, but it is not subject to the 10% early distribution penalty tax. The distribution must be taken within one year of the date of the birth or adoption.

A qualified birth or adoption distribution is includible in gross income but is not subject to the 10% additional tax under § 72(t)(1). A qualified birth or adoption distribution is defined as any distribution from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which the child of the individual is born or the legal adoption by the individual of an eligible adoptee is finalized.

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Question

I’m the beneficiary of an IRA. The IRA owner died in January 2021. He was age 72 in 2021, but never removed his RMD before he died.

Should I have removed his RMD for 2021 since he did not remove it?

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Answer

No, you don’t have to take a distribution to satisfy his 2021 RMD. Since he died in the year that he turned age 72, he would have had until his required beginning date (April 1, 2022) to remove his first RMD.

Since he died before that date, you are not required to take his RMD.

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Resource

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According to IRS Publication 590-B, if an account owner dies after turning 72, but before April 1 of the following year, no minimum distribution is required since he died before the required beginning date (RBD).

Question

Why am I getting a 1099-R if I made a rollover from one IRA to another IRA?

How do I prove that I made a rollover?

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Answer

A rollover between IRAs starts with a distribution. The rollover is completed if the assets are rolled over to an IRA within 60 days. We must report that distribution on IRS Form 1099-R since we do not know that it will be rolled over within 60 days.

The receiving financial organization will generate an IRS Form 5498 to show the rollover contribution.

As the IRA owner, you will report the rollover on your IRS Form 1040, lines 4a and 4b.

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Resource

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According to the Form 1040 and 1040-SR Instructions, you must include the amount of the distribution you rolled over on line 4a and enter “Rollover” next to line 4b. If the total amount was rolled over, you also enter -0- on line 4b.

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Question

I am the beneficiary of my father’s IRA and took a distribution for 2020 on December 15. I just found out today, January 15, 2021, that I was not required to take an RMD for 2020 and I would like to put it back into the account.

Can I put this money back into the inherited IRA?

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Answer

Nonspouse beneficiaries are generally not eligible to roll over any payments taken from an inherited IRA. However, the IRS granted an exception for 2020 RMD payments.

Unfortunately, the IRS only allowed nonspouse beneficiaries to roll over 2020 RMDs through August 31, 2020. Therefore, we are not able to take the money back now since that deadline has passed.

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Resource

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According to IRS Notice 2020-51 a nonspouse beneficiary only had until August 31, 2020, to roll over an RMD taken in 2020.

Question

My 2020 distribution was reported incorrectly.

It was a qualified charitable distribution and wasn’t taxable, so my IRS Form 1099-R shouldn’t show the $2,674.83 distribution as a taxable distribution in Box 1 and 2a or code 7 in Box 7. Will you correct this with the IRS?

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Answer

We report qualified charitable distributions like any other distribution from your IRA, which is IRS code 7, normal distribution.

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Resource

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According to the Instructions for Forms 1099-R and 5498, there is no special reporting for a qualified charitable distribution.

The Form 1040 and 1040-SR Instructions explain how you claim the distribution as a qualified charitable distribution on your income tax return.

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Question

It’s before the deadline and I’m filing my tax return for 2020. I realize that my tax rate is much lower than I expected for last year.

Can I convert money from my Traditional IRA to a Roth IRA for last year since it’s before the deadline?

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Answer

Unfortunately, there is no ability to do a “prior year” conversion like there is with regular IRA contributions. The distribution from the Traditional IRA is what triggers the taxation on the conversion.

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Resource

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Treas. Reg. §1.401A-4 Q&A 7

According to the Publication 590-A, you must include gross income from a Traditional IRA distribution in the year you converted the assets, as if you hadn’t converted the assets.

Question

My 73-year-old spouse died in 2017 and I haven’t done anything with her IRA. I would like to set up an inherited IRA and start life expectancy payments now. How do I do that?

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Answer

Since your wife died in 2017 after her required beginning date, you were required to take payments from that account each year.

We are not able to set up an inherited IRA now and continue taking payments.

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Resource

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Treas. Reg. 1.408-8, Q&A 5(b)

According to the Publication 590-B, if a spouse beneficiary fails to take a required minimum distribution by the deadline, he is deemed to be the IRA owner.

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Question

My brother and I are the beneficiaries of our dad’s IRA. Dad didn’t take his RMD this year, the year that he died. Which one of us is responsible for taking it?

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Answer

Because your dad’s IRA had multiple beneficiaries, the remaining RMD would be split between the two of you as the named primary beneficiaries, based on the percentages your dad listed on his beneficiary designation.

Both of you are responsible to ensure that the year-of-death RMD is paid out in the year of death.

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Resource

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Treas. Reg. §1.401(a)(9)-5

According to the Publication 590-B, any year-of-death RMD is the responsibility of the beneficiaries and must be paid out in the year of death.

Question

I requested a distribution from my Roth IRA on March 23, 2021. The check is dated March 23, but I did not receive it in the mail until March 26, 2021.

I know that I have 60 days to roll over the amount back into another Roth IRA, but when did my 60 days start?

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Answer

Day 1 of the 60-day period for rollovers is the day after you receive the check.

In your case, it would have started on March 27, 2021.

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Resource

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According to the Publication 590-A, you must complete the rollover by the 60th day after the day you receive the distribution.

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Question

I made a 2020 contribution in February 2021 that turned out to be an excess contribution since I didn’t have any eligible compensation for 2020.

I’ve already filed my 2020 tax return. Since it’s before the 2020 contribution deadline, can you fix your reporting to show the contribution as a 2021 contribution instead?

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Answer

Since you designated the contribution for 2020, we cannot change the year for which the contribution was made.

You may still remove a 2020 contribution as an excess if done by your tax return due date, including extensions. You will, however, need to amend your tax return to show this excess correction.

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Resource

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According to the Publication 590-A, if you filed your taxes timely you have an additional 6 months from your tax filing deadline, excluding extensions, to remove the contribution. You also need to file an amended tax return, report any related earnings, and include an explanation of the withdrawal.

Question

Can I receive a SEP contribution from my employer and also make a Roth IRA contribution for the same year?

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Answer

Yes, the IRA annual contribution limit includes only regular contributions to your Traditional and Roth IRA.

SEP contributions can be made in addition to your regular IRA contribution.

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Resource

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According to the Publication 590-A, SEP contributions from an employer are not included in the annual contribution limit for IRAs. In addition, Publication 560 states that SEP contributions do not affect the amount an individual can contribute to an IRA

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Question

Last week I took a distribution of $10,000 from my IRA, and I would like to roll over $6,000 today and $4,000 in 4 weeks.

Can I do that, or do I have to roll over all $10,000 at once? I’ve never taken money from my IRA before, so I’m not sure.

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Answer

You can roll over part of the IRA distribution today and part later, as long as both amounts are rolled over within 60 days from the date following the day you received the distribution.

Because you have not received an IRA distribution that was rolled over in the last 365 days, this will not violate the one-rollover-per-12-month rule.

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Resource

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According to the IRS Publication 590-A, the one-rollover-per-12-month rule is based on the distribution. The IRA owner is allowed only one distribution that is rolled over in a 12-month period.

Question

I have a 401(k) plan that allows my required minimum distribution to be delayed until retirement.

Can I roll over the entire plan balance in October 2021 if I am going to retire in December 2021?

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No. Your retirement year is considered your first distribution year, so you would have to receive your RMD and then roll over the remaining eligible assets.

Certain assets in a 401(k) plan are eligible for rollover treatment, and RMDs are not one of them.

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Resource

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According to the Publication 560, RMDs are specifically excluded from the amount of the plan balance that is eligible for rollover treatment.

Treas. Reg. §1.401(a)(9)-5 Q&A 1Treas. Reg. §1.402(c)-2, Q&A 3Treas. Reg. §1.402(c)-2, Q&A 7

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Question

I missed my 60-day deadline for completing the rollover. Is there anything I can do to have the rollover completed?

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Answer

If you missed your 60-day rollover deadline because of one of the 11 hardship reasons in Revenue Procedure 2016-47, you can complete the self-certification paperwork in Revenue Procedure 2020-46 and complete the rollover.

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Resource

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According to the Publication 590-A, an individual may self-certify a rollover after the 60-day deadline.

Rev Proc. 2016-47Rev Proc. 2020-46

Questions?

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Date post:	15-Mar-2022
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Finding Answers to Commonly Asked IRA Questions

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