208Accountant
Level 3
This widget could not be displayed.

A client had two accounts with a brokerage firm. Disappointed with the account's performance, she took all of the money and invested the sum of both accounts into a traditional IRA with a new broker.  

She received one 1099-R for $177,000 and one 1099-B for $16,000 in proceeds with a $1,000 capital loss. 

What I am concerned about is the $16,000 proceeds that were deposited into the traditional IRA because of the fact that it would create an excess contribution, subject to the additional 6% excise tax. 

Is there a way to indicate that the account was rolled over so as to avoid the excess contribution tax?  

Labels (1)
0 Cheers
sjrcpa
Level 15
This widget could not be displayed.

You can't "rollover" a nonIRA account to an IRA.

Contributing $16K to an IRA is an excess contribution.


ex-AllStar
208Accountant
Level 3
This widget could not be displayed.

Thank you so much for your response. I came to the same conclusion yesterday. I'll be calling the client today to advise her to withdraw the amount in excess of $7,000 before filing the return. 

 

qbteachmt
Level 15
This widget could not be displayed.

Hey, I just had a thought for consideration.

You learned this was Indirect Rollover. That means the distribution of the $117k would have the mandatory 20% withholding. That means the excess and really, the additional personal funds used that would count as contribution, can be applied as showing nearly a full Gross Rollover, and then the withholding likely will result in a tax payment refund.

Assuming we now understand all the facts correctly.

*******************************
"Level Up" is a gaming function, not a real life function.
qbteachmt
Level 15
This widget could not be displayed.

This is where you start: "A client had two accounts with a brokerage firm."

"Account" is too vague.

It seems your taxpayer had a Retirement account and an Investment account.

"she took all of the money"

What does "took" mean, specifically? I would have her speak with that investment broker who accepted the funds, who should have done some due diligence and would discover the Regular funds (the $16k) were not allowed to be put into an IRA. Everyone in that field knows there is an Annual Limit. This partial amount from the old Investment account should have triggered some questions. And the excess (whatever she doesn't qualify for) needs to be removed, so she needs to talk to them anyway.

*******************************
"Level Up" is a gaming function, not a real life function.
208Accountant
Level 3
This widget could not be displayed.

Hey qbteachmt... thank you for your response!

I did feel stupid for even asking this question yesterday. I was able to talk to someone yesterday and realized that the 1099-B proceeds cannot be "rolled over." I know now that a retirement account distribution will never be reported on a 1099-B. (Again, I feel stupid for posing this question.) 

Ultimately, the client cashed out the investment and the retirement account. She received two checks made payable to herself, which she then deposited into her checking again. Then she opened a traditional IRA and deposited all the funds into it. After researching this matter yesterday, it seems that is within the 60 day rule for the indirect IRA rollover, but that she will have an excess contribution for the other. Since she is over 50, she should have added no more than $7,000 to the IRA rollover. 

I'm going to call her today and advise her to take the excess contribution out of the IRA before filing the return. 

qbteachmt
Level 15
This widget could not be displayed.

There is no reason to feel stupid; these are complicated situations. Especially here:

"the client cashed out the investment and the retirement account. She received two checks made payable to herself,"

Because the clients get all sorts of concepts, or family members direct them to do things without taking individual circumstances into consideration. But even when this is Direct, the brokerages don't always follow what is allowed, either.

*******************************
"Level Up" is a gaming function, not a real life function.
0 Cheers