Sometimes, an error on Form 1099-R needs to be corrected by the financial institution. However, usually, the Form 1099-R is correct; it is just that the customer and/or their accountant are unfamiliar with how certain transactions must be reported to the IRS on Form 1099-R. This article will discuss several common situations and whether a corrected Form 1099-R is actually needed.
Reporting Roth IRA Death Distributions
Assume a Roth IRA owner, age 78, who had a Roth IRA with your financial institution for ten years, died in 2021 and left the funds to her nephew, age 45, who transferred the funds into an inherited Roth IRA. In 2022 her nephew took a distribution of $4,000 from his inherited Roth IRA. He received a Form 1099-R showing $4,000 in boxes 1, Gross distributions, and 2a, Taxable amount, and code 4, Death distribution, in box 7, Distribution code. He brought in his Form 1099-R because he believes it needs to be corrected. The nephew is right; his Form 1099-R needs to be corrected. The first issue is that box 2a, Taxable amount, should not have any amount entered in it for this type of distribution from a Roth IRA. The second error is that code 4, Death distribution, which was used in box 7, Distribution code, is incorrect. This is a distribution from the nephew’s inherited Roth IRA and code 4, Death distribution, is only used for a distribution to a beneficiary of a Traditional, SEP, or SIMPLE IRA. Instead, a financial institution should either use code T, Roth distribution exception applies, or code Q, Qualified distribution from a Roth IRA. Code Q is used if the five-year holding period was met (either by the decedent or by the decedent and beneficiary combined) with this financial institution. Code T is used if the five-year holding period is not met with that financial institution. Therefore, a corrected Form 1099-R needs to be completed by leaving box 2a blank, and using code Q in box 7.
Another common situation that customers feel that financial institutions report IRA distributions incorrectly on Form 1099-R is when the IRA owner rolled over the distributed funds to another IRA within the 60-day rollover period. The customer either feels that a Form 1099-R should never have been generated or that code G, Direct rollover and direct payment, should have been used in box 7, Distribution code. First, making a 60-day rollover contribution of an IRA distribution does not “undo” the Form 1099-R reporting of the distribution. Second, the only time a financial institution would use code G is if a Traditional IRA owner directly rolled over funds (e.g., funds were made payable to the plan sponsor) out of an IRA and into an employer plan (e.g., 401(k) plan).