Which boxes to check on Form 1099-R when IRA accountholder closes acco

[jlf]

Assume an IRA holder closes out his IRA account for $10,000. The check is made payable to the IRA holder. Which boxes are checked on the 1099-R?

[JohnCheek]

Box 1- gross distribution.

2a- taxable amount

3- mark total distrib

4- fed w/h, if any

7- distribution code, and mark next box for "IRA"

10- of any state tax w/h

Also, all the name and address and EIN boxes

[jlf]

John.....Based on my assumptions, is it not wrong to place $10,000 in box 2a, "Taxable amount"? Should not box 2a be left blank and box 2b, "Taxable amount not determined" be checked off instead?

A custodian placed $10,000 in box 2a and left box 2b blank. He checked off "Total distribution" and labeled the distribution as normal by placing a "7" in box 7. How could the closing out of the account be coded as a normal distribution?

The IRA holder has 60 days to rollover all or any part of the $10,000 to a successor IRA. The former custodian, therefore, did not have enough information to determine the taxable amount of the gross distribution and 2a should have been left blank. Am I correct?

Best,

Joel L. Frank

[JohnCheek]

Code 7- normal distribution- means the recipient was over 59-1/2, and not subject to a penalty for early distribution.

On Form 1099-R, the IRA custodian has to report the full amount as taxable, based of the custodian's records.

If you later complete the rollover within the 60 days, you can report the full distribution, and indicate that nothing is taxable, on your 1040.

[jlf]

Mr. Creek, are you saying it would have been wrong for the custoddian to check off 2b, "Taxable amount not determined"?

Joel L. Frank

[Guest Kathy Gray]

Mr. Creek, I disagree. Unless you know whether or not the account holder took a deduction for the contributions to which the distribution is attributable, the "taxable amount not determined" box should be checked.

[RCK]

I agree with John Cheek. When the participant took the distribution payable directly to himself, it became 100% taxable. It is not the payer's responsibility to follow up with the participant to see what they did with the money, and it does not matter.

At the point of distribution from the plan, the entire amount was taxable--this is not a direct rollover, where the payer can clearly say that the distribution did not create a taxable event.

[Guest Kathy Gray]

The rollover isn't really relevant. But, if the account holder didn't take any deductions when he made the contributions, only the interest is taxable, not the contributions.

So if the cutomer made $8000 in non-deductible contributions, and earned $2000 in interest, only the $2000 would be taxable. If you leave the box unchecked you're telling the IRS all $10,000 is taxable.

[RCK]

Ooops. I lost sight of the original question--that this distribution came from an IRA. I was thinking 401(k).

[jlf]

The Custodian refuses to issue a corrected 1099R. What should the distributee do to reconcile with the IRS?

Joel L. Frank

[Guest Kathy Gray]

If they were non-deductibe contributions, the customer should have filed Form 8606 with his taxes eachyear he made a contribution. These coupled with his 1040 should help hime prove the amount of basis in the account. There's a formula for calculating how much of the distribution is interest; you have to withdraw part of the interest with each distribution.

But the trustee should issue a corrected form. Perhaps he needs to speak with someone in their compliance department if he's not getting any help. He should refer them to IRS Publication "Instructions for 1099-R and 5498."

[JohnCheek]

My position is that the custodian should not have to issue a corrected 1099-R. It is perfectly ok for the custodian to report the entire amount in the taxable box; the custodian normally will not have any information to indicate if any of the distribution comes from nondeductible contributions. It is the account owner's responsibility to track nondeductible contributions.

On your 1040, report the full amount of the distribution in box15a, and report the amount that is taxable in box 15b.

For an IRA, it should not matter that your box 15b does not agree with the custodian's "taxable amount".

[jlf]

The total amount withdrawn, $10,000, is comprised of deductible contributions. It seems to me that line 15 of Form 1040 applies to 1099Rs when the gross distribution is not the same as the taxable amount. In the case at hand the gross distribution is the same as the taxable amount. So line 15 cannot be the place to show that the custodian reported the wrong amount as taxable. The Service has already been notified that the taxable amount is $10,000.00. If the distributee places $10,000 on line 15a and zero at 15b he still needs to prove to the Service that he rolled over the $10,000.00 within 60 days. Line 15 alone is not enough.

It seems to me that the distributee should attach a statement to his Form 1040. This statement should say that the custodian's labeling the total distribution as taxable is in error. Supporting documents should be attached to the statement showing the date and amount of the withdrawal and the date and amount of the rollover contribution with the successor custodian. This, I believe, is the paper trail that the Service will require. Am I on the right track?

Joel L. Frank

[JohnCheek]

You're right, line 15 is not enough.

Enter gross distrib on 15a.

Figure taxable amount on Form 8606., and enter that taxable amount on 15b.