January 28, 2021 at 5:40 pm #14324
In March, 2020 I took $70,000 from my Fidelity IRA thinking I needed to do so because of RMD requirements. After seeing the relief provided by the CARES act, I contacted Fidelity and asked them to reverse the transaction – which they did. The full amount went back into my IRA [although a small dividend was paid between the two events and I am reporting that as regular income].
Fast forward to the present: Fidelity has issued a 1099-R for the full $70,000 amount and reports it via boxes 1 & 2a as being taxable [although box 2b is checked to indicate that “the taxable amount is not determined” – whatever that means]. The box 7 distribution code is noted as “7” and the adjacent box has an “x” showing it to be an IRA.
How do I insure that the IRS knows that this taxable distribution was, in fact, not made? Do I have to do something or should Fidelity be sending supplemental information to straighten this out?
Thanks for your help.January 29, 2021 at 4:03 pm #14331
We were a few months into 2020 when Congress passed a law waiving the RMD requirement for the year, so Congress gave taxpayers until August 31, 2020 to return an early-year RMD distribution to an IRA or other retirement account. Report this as a rollover, even if it does not satisfy the usual 60-day rule for rollovers. Also note that it does not count as a rollover for purposes of the rule restricting you to one rollover per year. Whatever software you use to prepare your return should be able to handle this if you specify the distribution was rolled over.
As an aside, in some situations IRS rules require the designation “taxable amount not determined,” even if the reporting entity knows the taxable amount is zero. It’s a way of categorizing the transaction, not an indication that Fidelity is actually unclear about the tax treatment.January 29, 2021 at 8:55 pm #14333
Thanks for your response. I want to be clear though; I thought that a rollover involved taking money out and changing to a different investment or a different custodian. In my case the money came out of a particular Fidelity fund and was returned to the same Fidelity fund 2 1/2 months later. You are saying that this is to be treated as a rollover?January 29, 2021 at 8:57 pm #14334
Sorry – but one more fact. Between the time the fund was changed and it went back in, it was the same fund just redesignated as Roth.January 31, 2021 at 4:03 am #14341
As to your first question, the IRS has long allowed a return of money to the same IRA from which it was distributed to be treated as a rollover, if other requirements are met. The new wrinkles here are that taxpayers were allowed more than 60 days to return the money, and it doesn’t count for purposes of the rule limiting taxpayers to one rollover per year.
As to your second question, I understand the following happened: First, you took your RMD distribution, then you converted the IRA (or the part invested in this fund) to a Roth, and then, by August 31, you returned the money or assets to the same fund, which is now a Roth IRA. In that case, the amount you took as RMD distribution should be treated as a Roth conversion. It’s taxable because it ended up in a Roth, not a traditional IRA, but it’s a permissible transfer to a Roth because it was eligible for rollover.January 31, 2021 at 3:43 pm #14343
I didn’t make myself clear. The money came from a regular IRA, a mutual fund at Fidelity. The $70k came out of the IRA in March 2020 and that part [there was still some left in the IRA] was assigned to the same mutual fund investment only was designated as now a ROTH IRA. At that point in time I had an investment in the one mutual fund, the amount remaining was still a regular IRA and the March break-out was the same fund only now was a ROTH. Then in May, I directed Fidelity to reverse things so that this ROTH “went away” and the funds went back into the same fund [the regular IRA] at the same place. The objective was to make like the March transaction never took place. The only thing that muddied the waters was that between the two transactions a dividend was paid – not a problem, though, because I can just account for it as a distributed dividend that I will pay tax on. So the remaining question is how to properly report what Fidelity is calling a taxable distribution that, in reality, was “un-done”. There should not be a taxable distribution on the $70k because it was put back into the regular IRA account.
Thanks again and thanks for your patience. I hope my story make sense now.January 31, 2021 at 9:57 pm #14349
At this point the story does and does not make sense. It appears much has gone wrong here. I need to stress that the following is not legal advice, but merely thoughts based on imperfect knowledge of your situation. You should have a qualified tax professional review the situation and determine what you need to do.
At the time you took the money from your traditional IRA, you thought this distribution was needed to meet RMD requirements. But you had Fidelity put the money in a Roth IRA, which isn’t allowed for RMD distributions. You’re allowed to transfer money from a traditional IRA to a Roth, but only after you’ve taken your RMD. The RMD itself cannot be transferred to another IRA: not to a traditional IRA, and not to a Roth.
At that point, you had a valid RMD but not a valid contribution to the Roth. You would have had to remove the money from the Roth to prevent what we call an excess contribution, which incurs a penalty if not corrected. But then Congress changed the law, eliminating the need to take RMD for 2020. Magically, the money coming out of the traditional IRA became eligible for transfer to a Roth. You now had a perfectly good Roth conversion. This is a taxable event, but not improper, so it doesn’t incur a penalty.
Then, however, hearing that RMD were not required for 2020, you believed you could avoid paying tax on this amount by moving it back to the traditional IRA. This would have been permissible if you had simply taken the money out of the traditional IRA, putting it in a regular investment account or bank account. In that case, you could have returned the money to the traditional IRA and paid no tax. Unfortunately, due to a 2017 change in the law, you aren’t allowed to move money back to a traditional IRA after moving it to a Roth.
This means you’ve made an excess contribution to your traditional IRA, which will incur penalties unless corrected. The simplest remedy is to take the money out of the traditional IRA and pay tax on it. Less simple, but more favorable, would be a return of the money to the Roth, which I believe may be permissible under the “recharacterization” rule, which still exists even though it can no longer be used to undo a Roth conversion. You would have to pay tax on the $70,000, but you would not pay excess contribution penalties, and you would get to keep the money in a tax-favored retirement account. Still more complicated would be to figure out some way to obtain relief from the IRS (perhaps through the taxpayer advocate) allowing you to keep the money in the traditional IRA without paying tax on it and without incurring any penalties. I suspect this kind of relief isn’t available, and the best you’ll be able to do is move the money back to the Roth, so you have a permissible but taxable Roth conversion.
I suggest you start by conveying all this to Fidelity and see if they have someone knowledgeable to comment on it from their end. Then take it to a qualified tax professional to see what they think.February 1, 2021 at 3:39 pm #14351
Kaye, I owe you a huge apology. After reading your last post I went back into my account documentation to try and figure out how I could have been so stupid. As is turns out, I was not so stupid as to what I did, but was in how I remembered things and how I characterized it to you. It appears that I did the right thing with the RMD and it’s reversal but in contemplating what to do next, i.e. whether after the withdrawal was put back into the IRA I could then afford from the standpoint of a hit on my taxes, to go ahead with cashing in that amount and converting it to a Roth. In actual fact, I thought about it for so long that I thought that I had done it – and conflated the two events and timelines. I know this probably doesn’t make much sense now to you at this point so if you will allow me to just start over. Please ignore the ramblings of my previous posts about a Roth – there is none, there never was one. Here is what really happened:
On March 6, 2020 I withdrew $70k from my Fidelity IRA based on the amount I knew I needed to satisfy my RMD for 2020. The money went into my cash management account with Fidelity [not to any Roth account or any other IRA]. On May 28, 2020 I contacted Fidelity after hearing of the CARES relief canceling the RMD requirement for 2020, and had them put the money back into the same IRA it came out of [the money was still in my cash account so this was easy]. They did this and noted on my statements that the funds were going back as “rollover shares”. So far, so good. I recently received a 1099R showing the money coming out of the IRA but am puzzled as to what to show the IRS to prove that it went back in. So, finally, my question: What document or notation needs to be generated that tells the IRS that the money went back into the IRA and that the net effect as far as taxation is zero? I suspect that the answer has to do with a “2020 Form 5498 IRA Contribution Information” that I just received from Fidelity showing a line 2 rollover contribution of $71,260.81. And I further suspect the difference between the $71,260.81 and $70,000 reflects the fact that a specific number of shares were transferred out and back in [not a dollar amount] and the $1,260.81 difference is the amount the shares appreciated between the transactions. So if all of this is correct, do I include form 5498 with my taxes or account for it’s numbers somewhere on my 1040?
Again, my sincere apologies for all of the confusion. Your efforts are appreciated more than you can know. Let me know if the above now makes sense so I can put this to bed and stop bothering you.February 5, 2021 at 5:31 pm #14387
It appears you have a quite simple situation, except for one twist explained below.
I’m assuming your $70,000 was taken in the form of shares of a mutual fund or stock, there was no withholding, and the same shares were returned to the IRA. If the amount you were required to take as RMD for 2020 (without regard to the CARES Act) was $70,000 or more, you are permitted to transfer these shares back to the IRA, treating the transfer as a rollover, even though it is outside the 60-day window that normally applies, and even though the shares apparently rose in value during the time they were outside the IRA. When you take a distribution of anything other than cash, you can transfer the same property (or proceeds from sale of the property) in the rollover.
This special rule provides relief only for distributions up to the amount you were required to take as RMD. If that amount was less than $70,000, and you rounded up to that number, part of what you transferred back to the IRA doesn’t qualify for the relief. Because the this occurred more than 60 days after the initial transfer, this portion would not qualify to be rolled back.
If you happen to have earned income, you can treat this additional amount as a a regular contribution to the IRA, up to the amount of your earned income or the dollar limit on regular IRA contributions ($7,000 for those age 50 or older), whichever is less. The age limit on regular contributions to traditional IRAs has been repealed, effective 2020.
If you don’t have earned income, or if the difference between the $70,000 you withdrew and the amount you were required to take as RMD exceeds either your earned income or the IRA contribution limit, you have an excess contribution. You should notify Fidelity and have them guide you through a corrective distribution that will avoid penalties on this excess contribution. This has to be done by October 15, but the sooner you address it, the better. As a practical matter, if the amount is so small as to be trivial (for example, the required amount was $69,994), it may be reasonable to ignore the difference, but if it is at all substantial you should take corrective action.
You don’t have to submit any documentation with your return. Details of the reporting will depend on whether you have an excess amount, and if so, whether that amount is a permitted contribution or an excess contribution.February 6, 2021 at 1:57 pm #14394
Thanks for your reply. I think I understand what you are saying, but let me summarize:
My required RMD would have been $69,023.27. As you suspect I did round it up to $70,000. It was an in-kind transfer of mutual fund shares, there was no with-holding and the same shares and number of shares were later returned to the IRA. I have no earned income. So it would appear that unless the IRS considers $977 a “trivial amount”, I do, indeed have an excess contribution. If this is an accurate reading of your advice, I should contact Fidelity to guide me through a “corrective distribution”.
Do I have this right?February 6, 2021 at 3:02 pm #14395
Yes, that’s right. IRS would certainly penalize an excess in this amount if they became aware of it. Taking the corrective distribution is no big deal, but you need to contact Fidelity, rather than simply withdraw $977, because the amount you withdraw has to be adjusted for any investment earnings during the period the excess is in the IRA.
Although you’re taking the corrective distribution in 2021, you’ll have to report it as taxable income on your 2020 return. That includes the portion representing investment earnings, even if the earnings accrued in 2021.
The corrective distribution doesn’t count toward your 2021 RMD, and it’s not eligible for rollover or Roth conversion. In other words, it can’t remain in or go to a retirement account.
The penalty for failure to correct is 6%, which wouldn’t be a crushing blow, but it applies year after year until the problem is corrected, so it’s best to take care of it now.February 8, 2021 at 5:02 pm #14417
You’ll be glad to know I contacted Fidelity this morning and they assured me they could correct things. It appears that I’m not the only one this year that made that mistake. So, again, thanks to you and I think we can put this one to bed.
Friendship7 over and out.February 8, 2021 at 5:51 pm #14418
I’m pleased to have helped bring the mission in for a safe landing.
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