Roth-IRA Rollover Form 1099-R question

[Dilaudidopenia]

In 2017 I rolled over a small roth IRA from a credit union to my Vanguard Roth IRA.  A check was given to made out to "Vanguard For Benefit Of...my name" and I sent the check into vanguard.  No taxes were taken out.  As far as I know, this is considered a direct rollover as the check was written "FBO" am I correct?

On the 1099-R I was issued from the credit union, in box 7 it says "J" for the distribution code which is "early distribution of roth IRA." Is this the right distribution code? How to I file this at tax time?

[jfoxcpacfp]

I believe Code J is used when the payor does not know if the distribution qualifies for penalty/tax relief. I'm kind of surprised they used "J" if they knew it was going to another Roth account and the check wasn't issued directly to you. However, you will be able to rectify this yourself on your form 8606 by entering your basis on page 2.

Agree, @spiritrider?

[ENT Doc]

jfoxcpacfp wrote:

I believe Code J is used when the payor does not know if the distribution qualifies for penalty/tax relief. I’m kind of surprised they used “J” if they knew it was going to another Roth account and the check wasn’t issued directly to you. However, you will be able to rectify this yourself on your form 8606 by entering your basis on page 2.

Agree, @spiritrider?

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Doesn't the 1099-R instruction for this point you to Form 5329 to see if there is a qualifying exception?  His situation doesn't appear to be one of the exceptions listed.  I'm surprised they used J - shouldn't it be H?  OP, what was the turnaround on depositing the check?

[jfoxcpacfp]

ENT Doc wrote:

Doesn’t the 1099-R instruction for this point you to Form 5329 to see if there is a qualifying exception?  His situation doesn’t appear to be one of the exceptions listed.  I’m surprised they used J – shouldn’t it be H?  OP, what was the turnaround on depositing the check?

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I'm just saying there is more than one way to skin a cat and this can be easily rectified on the 8606. The codes aren't always correct but, if you can get the results you want when filing, it's a lot easier than requesting and waiting for an amended 1099-R.

[Dilaudidopenia]

I sent in the check within a week.

I talked this over with my family member who is also a CPA and she agrees that it can be taken care of on form 8606.  I'll also run it by my personal CPA.

Johanna, do you think I'm safe going this route?  This credit union has been a real pain to deal with with regards to getting these funds transferred with and I'd rather not deal with them further if not needed.  I do have a physical copy of the Roth IRA paperwork that clearly has it checked off that the funds were being "transferred to another roth IRA" as well as a copy of the check that says "Vanguard FBO me" should the IRS give me any trouble.

[ENT Doc]

jfoxcpacfp wrote:

ENT Doc wrote:

Doesn’t the 1099-R instruction for this point you to Form 5329 to see if there is a qualifying exception?  His situation doesn’t appear to be one of the exceptions listed.  I’m surprised they used J – shouldn’t it be H?  OP, what was the turnaround on depositing the check? 

Click to expand…

I’m just saying there is more than one way to skin a cat and this can be easily rectified on the 8606. The codes aren’t always correct but, if you can get the results you want when filing, it’s a lot easier than requesting and waiting for an amended 1099-R.

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Section III of 8606:

"Complete this part only if you took a distribution from a Roth IRA in 2016. For this purpose, a distribution does not include a rollover, qualified charitable distribution, one-time distribution to fund an HSA, recharacterization, or return of certain contributions (see instructions)."

Since this was a rollover and since sections I and II don't apply, how can you use the 8606 to address this?  This is getting into the weeds, certainly beyond my knowledge.  I'm just looking at it from a simple guy's perspective, getting this 1099-R and following the instructions provided by the IRS.  I guess my concern is how one would necessarily know, absent being on forums like this with your help, how to rectify this without getting the 1099-R adjusted.

[jfoxcpacfp]

ENT Doc wrote:

Section III of 8606: “Complete this part only if you took a distribution from a Roth IRA in 2016. For this purpose, a distribution does not include a rollover, qualified charitable distribution, one-time distribution to fund an HSA, recharacterization, or return of certain contributions (see instructions).” Since this was a rollover and since sections I and II don’t apply, how can you use the 8606 to address this?  This is getting into the weeds, certainly beyond my knowledge.  I’m just looking at it from a simple guy’s perspective, getting this 1099-R and following the instructions provided by the IRS.  I guess my concern is how one would necessarily know, absent being on forums like this with your help, how to rectify this without getting the 1099-R adjusted.

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Yes, I get that. But if we got that form from a client in our office, we would probably just fill in line 22 with the amount of the "distribution", same as if the check h/b made out to Dilaudidopenia who then deposited it in the other Roth w/i the 60-day limit. The IRS really doesn't care in these situations as long as the end result is correct.

I have no idea how one would necessarily know w/o working in the industry or just taking a flying leap of creativity and filling it out that way. It's done. It's not like it's a big deal either way, though. I bet you would be amazed at the way people fill out their tax forms and never hear a peep from the IRS. And I've seen many times they pay more taxes than necessary and they don't hear a peep about that, either.

[jfoxcpacfp]

Dilaudidopenia wrote:

Johanna, do you think I’m safe going this route?  This credit union has been a real pain to deal with with regards to getting these funds transferred with and I’d rather not deal with them further if not needed.  I do have a physical copy of the Roth IRA paperwork that clearly has it checked off that the funds were being “transferred to another roth IRA” as well as a copy of the check that says “Vanguard FBO me” should the IRS give me any trouble.

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Yes, I think you're safe going this route. Somebody in bookkeeping just picked the wrong code but the results will be the same. Again, this is not something that would flag anything in matching.

[Dilaudidopenia]

Update:

Contacted credit union who said that they classified as "J" since they didn't directly transfer funds to Vanguard, even though check was written"FBO" and I never took control of the funds myself.  Mildly irritating since I'm pretty sure this definitely fits the definition of a "direct rollover."  I guess I can just have my CPA do this as an indirect transfer as a distribution and re-deposit within 60 days on form 8606.

Final quick question: In addition to this maneuver, in 2017 I also did a backdoor Roth and transferred my previous employer sponsored 403b/401a to my new individual 401k. As far as I know, the summation of these maneuvers does not violate any part of the "one IRA rollover per year" rule, right?

 

[cgossage]

It's not uncommon for brokerages to classify as "J" when they cut the check.  It is more of a pain.  I feel like they do it to cover themselves if somehow you cashed the check for your own use.

You are correct.  The one IRA rollover per year rule does not apply to Backdoor Roth Conversions, rollovers from IRA's to 401(k)'s, or rollovers between plans.