Certain retirement payments or distributions a taxpayer receives from a retirement plan or IRA can be “rolled over” by depositing the payment into another retirement plan or IRA within 60 days of the date of distribution. By rolling over the retirement plan distribution, the taxpayer generally does not pay tax on any portion of the rollover amount until they later withdraw it from the new plan. However, the taxpayer must still report the distributions on their tax return. If the taxpayer does not roll over a retirement distribution, it will normally be taxable (other than qualified Roth distributions and any amounts already taxed) and it may also be subject to a 10% additional tax on early distributions unless the taxpayer is eligible for one of the exceptions to the 10% additional tax on early distributions.
Types of Rollovers. Distributions that can be rolled over are called “eligible rollover distributions.” Like all retirement plans or IRA distributions, rollover distributions are reported to the taxpayer on the source document ‘Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.’ Depending upon the manner in which the rollover occurs it can affect whether taxes are withheld from the distribution and how the taxable amount is reported on Form 1099-R. Rollovers can occur in the following ways:
Direct Rollovers occur when the plan administrator of the retirement plan makes the payment or distribution directly on the taxpayer’s behalf to another retirement plan or IRA. No taxes are typically withheld from such a transfer and the taxable amount reported on Form 1099-R, Box 2a should be ‘0’ (zero). The Distribution Code listed in Box 7 should be ‘G.’
Trustee to Trustee transfers occur when the financial institution holding the IRA sends the payment or distribution directly to another financial institution. No taxes are typically withheld from such a transfer and the taxable amount reflected on Form 1099-R, Box 2a should be ‘0’ (zero). The Distribution Code listed in Box 7 should be ‘G.’
60-day rollovers occur when the distribution or payment is made directly to the taxpayer and taxes are normally (but not always) withheld from the distributed amount. In this case the taxpayer has 60 days to deposit all or some portion of the distribution into another retirement plan or IRA. In this case the taxable amount reflected in Form 1099-R, Box 2a may be the same amount as the gross distribution in Box 1, or it may be blank and not be determined. In this instance, the taxpayer has to calculate the taxable amount, if any to be reported on Form 1040. Also, the Distribution Code listed in Box 7 is likely to be either a ‘1’ (Early Distribution if under age 59 1/2 at the time of the distribution) or ‘7’ – (Normal Distribution when the recipient is over 59 1/2 at the time of the distribution).
To enter a rollover distribution into Keystone Tax Solutions that is reported on a Form 1099-R, from the Main Menu of the Tax Return (Form 1040) select:
Income Menu
IRA, Pension Distributions (1099R, RRB-1099-R)
Select ‘New’ and whether the Payee on the 1099-R is the Taxpayer or Spouse.
Enter the Payer EIN, Name and Address.
Enter the amount of the gross distribution in Box 1. This amount will transfer to Form 1040, Line 15a if the distribution was from an IRA or Form 1040, Line 16a if it was from a retirement plan. This amount will default automatically to Box 2a.
Enter in Box 2a the actual taxable amount.
If the rollover was a Direct Rollover or a Trustee to Trustee Rollover as described above, the amount entered in Box 2a should be ‘0’ (zero). A prompt asking “Was All/Part of Distribution Rolled Over?” should be answered ‘Yes,’ and when prompted, the entire amount rolled over should be entered. This will result in no amount of the distribution being deemed taxable and nothing will carry to Form 1040, Line 15b (for a rollover from an IRA) or Form 1040, Line 16b (for a rollover from a retirement plan). On Form 1040, “Rollover” will be entered next to line 15b or Line 16b. Typically, no taxes should have been withheld and the only remaining entry is to enter the Distribution Code of ‘G” in Box 7.
If the distribution or payment was made directly to the taxpayer and they deposited all of the distribution (including the amount of any tax withheld) into another qualified retirement plan or IRA within 60 days of the date of the distribution, a 60-day rollover, it will be entered in the same manner as a Direct Rollover (except the Distribution Code in Box 7 will not be a ‘G’). However, if only part of the gross distribution was rolled over, enter in Box 2a the gross distribution amount less the amount that was deposited into another qualified retirement plan or IRA. A prompt asking “Was All/Part of Distribution Rolled Over?” should then be answered ‘Yes.’ A second prompt will then be given where only the portion of the gross distribution that was rolled over to another retirement account or IRA should be entered. This will result in the part of the gross distribution not rolled over being deemed taxable and that amount will carry to Form 1040, Line 15b (for a distribution from an IRA) or Form 1040, Line 16b (for a distribution from a retirement plan). On the Form 1040, “Rollover” will be entered next to line 15b or Line 16b indicating that a portion of the distribution was rolled over.
Enter all remaining items on the 1099-R. When entering the Distribution Code in Box 7, if the Code is a ‘7’ or ‘G’, no further action is necessary. However, if the Distribution Code is a ‘1,’ a prompt will be given to Select “Form 5329 Options” which is the 10% Additional Tax for Early Withdrawal. Unless an exception to the 10% additional tax on early distributions is available, Option 2, “Transfer 1099-R Box 2a to Form 5329, Part 1, Line 1 would be selected. In this situation if the taxpayer did not roll over the entire distribution, the 10% penalty will apply.
NOTE: This is a guide on entering Rollovers of Retirement Plans and IRA Distributions into the Keystone Tax Solutions program. This is not intended as tax advice.