When a Form 1099-R arrives in the mail for an IRA rollover that is supposed to be tax-free, you probably get nervous. Especially when you see the information on the form saying that the information has been forwarded to the Internal Revenue Service. IRA trustees are required to report any events involving withdrawals of any type to the IRS, even if the event is a rollover that is tax-free. However, you still need to account correctly for this rollover on your income tax returns.
You can account for IRA rollovers using IRS Form 1099-R.
Rollover With the Same Trustee
If you are rolling over an IRA to a different account with the same trustee, the distribution should be reported correctly on the Form 1099-R. Box 1 will show the entire amount that you rolled over as a distribution. Box 2a will show the taxable amount of the rollover. When the same trustee handles the entire transaction, the taxable amount should show accurately as zero.
Trustee to Trustee
When a rollover is completed between two different trustees, the reporting is more likely to be incorrect due to the additional person involved. However, since an IRA trustee requested that the funds be transferred directly to it, the trustee disbursing the money should recognize that this is a tax-free event.
It will still report the total amount of the rollover in box 1 of Form 1099-R as a distribution, but the taxable amount in box 2a should be reported as zero.
Understanding Tax-Free Rollovers
If you are completing a tax-free rollover by withdrawing the money yourself, you have up to 60 days to re-deposit the money in the same IRA or a different IRA of the same type and not owe taxes or penalties. If you redeposit the money into the same IRA, the trustee will usually report the taxable amount of the distribution as zero on Form 1099-R, box 2a.
If you deposit the money into an IRA with another trustee, the trustee disbursing the funds will probably report the entire amount of the rollover as taxable in box 2a. In this case, the trustee receiving the funds needs to file Form 5498, IRA Contributions, and list the amount as a rollover contribution so that it is reported correctly.
Identifying the Distribution Code
Box 7 of Form 1099-R shows the distribution code for the transaction. This is an identifier the IRS uses to help determine if the transaction is taxable. Code G is used for rollovers from one institution to another that are tax-free.
Filing Your Taxes
Report the amount listed in box 1 of Form 1099-R on line 15a of Form 1040, or line 11a of Form 1040A. On line 15b or 11b of the correct form, report the taxable amount of the distribution from box 2a of Form 1099-R. Write the word "rollover" next to line 15b or 11b.
Exploring Other Considerations
If you withdraw funds from an IRA in December 2017, and redeposit the funds in February 2018 as a tax-free rollover, the trustee of the IRA will issue a Form 1099-R for 2017 showing the entire amount as taxable.
File your taxes showing zero as the taxable amount, and attach a statement explaining the rollover status of the IRA and why the amount is not taxable. Retain the documentation proving that you made the contribution, including any receipts and Form 5498 to file the following year.