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1 and 2) Yes, you are correct.
3 and 4) No 8606 required, as the distribution is still qualified, even though partial. No breakdown needed.
Since Roth IRAs were first available in 1998, the oldest your Roth IRA could be is 22 years. Nonetheless, if your first legal Roth contribution was prior to 2016, your Roth is now fully qualified and tax free.
1) No tax or penalty since the distribution is qualified. You do not need to report it on Form 8606, just directly on line 4a of Form 1040.
4) Not for the distribution, but you will for the conversion on your 2019 return.
5) Line 4a only, nothing on 4b.
Hopefully, you do not have to take a large Roth distribution, since leaving the Roth balance alone will continue to generate non reportable tax free earnings for life.
It’s possible they will not issue a 1099R which would eliminate your need to report the distribution/rollover. But I would not bet on that.
Line 4c indicates these were qualified plans, so these two 60 day rollovers would not have been a problem. I assume you replaced any withholding to complete the rollovers. Reporting on 4c and 4d as you stated.
Second paragraph – with Notice 2020-51 you can roll the June 3rd distribution either back to the plan or more likely to an IRA. You have until 8/31 to complete that rollover, but only because the distribution would have been an RMD had 2020 RMDs not been waived. You will get 3 1099R forms, one from each plan, and all of them can be added together for lines 4c and 4d. Company 3 may not acceptance the rollback, and it might be easier to roll it to the IRA instead. The IRA will issue a 5498 reporting the total of these rollover contributions, so the IRS will know you rolled them over. Since 401k plans do not issue 5498 forms showing rollover contributions, that is another reason for rolling the June dist to an IRA. It will save you from having to make a explanatory statement with your return that you rolled a distribution to a non IRA plan.
And the old default rule for sole spousal beneficiaries continues to apply under which an inherited IRA from which the RMD is not distributed is deemed to have been assumed by the survivor. Therefore, the unknown is now whether that will happen after one year for failure to take the annual RMD as an EDB or at the end of 10 years for failure to drain the account under the 10 year rule. The spouse needs to know whether they have defaulted to ownership or not, so we are back to square 1 with the question of whether the spouse can elect the 10 year rule to avoid annual RMDs.
With respect to rolling over at the end of year 9, that should be OK, but they should never wait until the 10th year if they are going to take a distribution since that distribution could be deemed to be an RMD under the 10 year rule and not rollover eligible. The spouse should always do the spousal rollover by direct trustee transfer, that way there is NO distribution that the IRS could deem to be an RMD.
This is analogous to the old rule for a qualified plan with the 5 year rule as the default for deaths prior to RBD. For a QRP where direct rollovers are treated as distributions, a surviving spouse had to do any rollover before the 5th year. If they waited until the 5th year the entire balance became an RMD because it had to be reported as a distribution on the 1099R, and the stretch was lost.
Of course, we are discussing the outlier of a spouse preferring the 10 year rule to avoid annual RMDs and that should be very rare. It almost never happened with the old 5 year rule, but perhaps 10 years will be more tempting.
Am still speculating here, not knowing how the eventual IRS guidance will read. Natalie Choate for one apparently feels that the 10 year rule is OFF the table with respect to EDBs, but there are still several aspects of Secure that even she is not sure what the IRS will do. The Secure guidance has been pushed back by Covid, so there may continue to be several situations remaining in limbo as time passes.
Hi Bruce. It is interesting to first examine the old RMD rules with respect to the election of the 5 year rule for a sole spousal beneficiary. First, although the 5 year rule was rarely elected due to disadvantages in most cases, the spouse COULD make that election and no annual RMDs would be required until the 5th year. There was an added risk here, since if the spouse took a distribution in the 5th year, it would have been an RMD and could not be rolled over, and that distribution could well have been the entire account balance. That said, if the surviving spouse elected to assume ownership in that 5th year, they would have successfully accomplished the spousal rollover.
Moving from there to Secure, the 10 year rule has replaced the 5 year rule for non EDBs regardless of when owner passes, and LE RMDs disappear. But it’s not clear if a surviving spouse EDB can still elect that 10 year rule, avoid annual RMDs, and then elect to assume ownership anytime prior to the end of year 10. Or is LE the only option for EDBs?
I see the “conflict” you cited as not being 5 years v 10 years, but rather LE v 10 years. 5 years is definitely out except for non DBs, but the way I read it a surviving spouse and other EDBs still have the option to elect the 10 year rule AND regardless of when the owner passed. There are risks of making this election, and disagreement over this option as well. The IRS will have to clarify this, but historically surviving spouse beneficiaries have always enjoyed the broadest of options.June 9, 2020 at 9:34 pm in reply to: taxes on transfer of stock to children for gifting #7250
Assuming the shares are valued at equal or more than the parent’s adjusted basis at the time of transfer, the children will use the parent’s basis for reporting the sale of any shares. There is no tax consequence to the parents including gift tax since the donation is within the annual exclusion amount.
In other words, if the cost basis is low, the children might owe considerable LT cap gains. The holding period for the shares includes the time owned by parents.
It would require a 1040X because a conversion must be reported on Form 8606. Because the distribution was in 2019, a rollover however late would also be reported on the 2019 return.
Note that even if this provision passes into law, like some other CARES Act provisions, retirement plans are NOT REQUIRED to adopt these provisions. And it’s possible that some plan custodians will take their time to decide should the provision pass. For custodians, 2019 roll backs are even more disruptive to their processing platforms than the 2020 RMD waiver.
Presumably, if VG accepts 2019 RMD rollovers, they would report them like an ordinary 60 day rollover conversion made in December and rolled into the Roth in January. Form 5498 would show a 2020 conversion for purposes of the conversion 5 year holding period, but the conversion would be reported by the taxpayer on a 2019 or 2019 amended return using Form 8606. The IRS might also add additional reporting changes. Note that these are not 3 year repayments like CRDs, rather they must be completed by 11/30/2020 and the taxes paid with the 2019 return.
Note that you would leave your 2019 QCD as is, but since 2019 RMDs would be waived the QCD saves you less. However, if you did the QCD out of order, it no longer matters since with no 2019 RMDs, a QCD could be done anytime in relation to other distributions.
If this provision becomes law, it will take VG some time to decide how to deal with rollovers, whether to accept them, and how to process them.
I agree. As long as the HSA is otherwise considered to be CP, it should get a 100% basis adjustment upon the death of the HSA owner. Note that retirement accounts are also treated as CP even though titled just to just one individual, although basis adjustment does not apply to retirement accounts in the first place.
Yes, that is correct. There is no penalty, however you will owe ordinary income tax.
You can convert as much of your TIRA as you feel comfortable paying taxes on this year. With RMDs waived for 2020, the order in which you do any QCDs or conversions does not matter as it does in other years with RMDs. But you will have to make a decision how to pay your taxes. Your choices are either to pay quarterly estimates (first and second payments due by 7/15), or take an IRA Distribution with 99% withheld just to produce the withholding. Withholding from SS is also an option, but there are only 7 payments left and I don’t think SS is very efficient in starting and stopping such withholding.
To be clear, your conversions and any withholding distributions will generate taxable income, but the QCD will not. Not sure what 50k TAX means, seems too high for your tax bill, but probably too low to be your AGI. Taxable income will be your total income including conversions and the taxable portion of SS benefits, then you subtract your standard or itemized deductions to arrive at your taxable income. You can probably look at your tax liability and marginal rate for 2019, and if you convert an amount in 2020 equal to what your 2019 RMD was, you may be fairly close to knowing your tax liability for 2020. Generally, you would not want to convert so much more than what your 2020 RMD would have been that your marginal rate exceeds what you expect it to be in the future when RMDs resume. The tough part is estimating what your marginal rate might be in the future if you do not convert, and taxes go up sooner rather than later due to the massive federal debt level.
Yes, that is correct. In 2020, with no RMDs, a person can do a QCD, a non conversion distribution, or a conversion in any order, or do multiple such transactions in any order they wish. These QCDs can be more or less than what the RMD would have been (but not over 100k), and the conversions can also be more or less than the RMD would have been. In other words, the amount that would have been the RMD is totally immaterial.
Q 1 – Correct. The 1099R should just be checked for accuracy, and if correct retained with 2019 tax records.
Q 2 – Yes, no way to claim the loss even if all Roth IRAs were closed because the TCJA suspended misc deductions subject to 2% floor through 2025.
Fidelity was correct only with respect to the converted distribution as the 1099R will report the value of the shares when distributed and you will owe tax on that amount.
But the other rollover to a TIRA account is non taxable whether the shares rose or dropped while not being in an IRA.
1) If the contribution is non deductible, Form 8606 will show 6000 on line 1, the same amount as the original Roth contribution.
2) Correct. The box 7 code should be “R”.
3) The 5498 reporting the Roth contribution will not be corrected, but the Roth custodian will issue the 1099R described above. There will also be a 2020 5498 issued for the TIRA account showing receipt of a recharacterized contribution of 5800 in Box 4.
4) Correct, a 1099R will be issued for the TIRA reporting a distribution of 5800, and a 5498 issued by the Roth custodian reporting receipt of a conversion contribution of 5800.