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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Hi. I live abroad. At the end of last year I rolled $5,000

Customer Question

Hi. I live abroad. At the end of last year I rolled $5,000 from an IRA over into a Roth IRA. The brokerage firm withheld 30% of the amount in taxes. They sent me a 5498 and a 1042 S reporting the event.

But they told me they will not send me the 1099 R until 2011.

I'm now doing my 2010 taxes. Apparently I cannot report the rollover until I get the 1099 R that the brokerage firm reports to the IRS. Do I just report the 5000 dollars as a withdrawal from the IRA? Is there not a 10% fine on withdrawing without rolling over?

What forms do I fill out?

Thanks!
Submitted: 3 years ago.
Category: Tax
Expert:  Stephen G. replied 3 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

If the transaction occurred in 2010, you should have the 1099-R already.

Stephen E. Grizey :

Are you sure this was completed in 2010?

Stephen E. Grizey :

If you rolled the $5,000. into a Roth IRA there is no penalty.

Customer :

Oh well. Yes, it was completed in 2010 like I said, and like I said the brokerage firm told me they won't have the 1099-R out until 2011.

Stephen E. Grizey :

This is 2011?

Stephen E. Grizey :

2011 for 2010?

Stephen E. Grizey :

or 2012 for 2011?

Customer :

They just said the 1099-R won't come out until later this year. I asked them to check and they had no answer.

Stephen E. Grizey :

OK hold on a minute while I check something.

Stephen E. Grizey :

what is the code in Box 1 of the 1042-S?

Customer :

14

Stephen E. Grizey :

OK, well the 1042-S supports the withholding, so yes you can report the distribution as an IRA distribution.

Customer :

But won't that mean I'll have to pay the 10% early withdrawal penalty?

Customer :

I mean, it is a rollover and the money is all in a Roth IRA. So would I pay and then get a refund of the penalty next year or something? Seems weird.

Stephen E. Grizey :

No. You realize that you have the option of reporting 50% of the income in 2011 & 50% in 2012?

Stephen E. Grizey :

There's no penalty on a rollover to a Roth. You didn't keep the money.

Customer :

I understand there's no penalty on a rollover to a Roth, but without a 1099 R how is the IRS ever going to believe it? Do I just tell them and then prove it later on when I (finally) get the 1099 R?

Customer :

About the income, I have a lot of deductions in 10 and I want the income there anyway.

Stephen E. Grizey :

The same way they believe anything else. The only time there's a problem is if things don't match to your tax return. I have a feeling that your brokerage firm is sending the 1099-R for 2011 & 2012?

Customer :

Sounds very possible that that's what the brokerage firm is doing. But in the meantime if I report a rollover and the IRS does not find that the brokerage firm reported it yet they will NOT like it.

Stephen E. Grizey :

Well I supposed you could file Form 5329 & indicate that you qualify for an exception to the penalty. A direct rollover from Trustee to Trustee is not considered a withdrawal.

Stephen E. Grizey :

The IRS isn't going to have anything that tells them anything to the contrary in regards XXXXX XXXXX conversion.

Stephen E. Grizey :

The 5329 isn't used for this purpose, so it isn't required. There's no exception that's applicable as the rollover doesn't require any penalty. Code 11 - other is an option, but the instructions for that code aren't applicable to your siutuation.

Stephen E. Grizey :

Please remember to "ACCEPT", it is the only way we get credit for our work. Feedback, if you have time, and bonuses, where you feel they are warranted, are always most appreciated. Thanks again for using our service. I'll be happy to answer any follow-up questions you may have.

Customer :

Steve, you worked hard it's true but I am nowhere near closer to an answer than I was at the start.

Expert:  Robin D. replied 3 years ago.

Hello
Form 5498 includes all regular and Roth IRA contributions for the previous tax year and all regular and Roth IRA contributions made through April 15, 2011 attributed to the 2010 tax year. The 5498 Form is your proof of the Conversion from Trad IRA to ROTH IRA. You will need to show the conversion on your 2010 tax return as well as the withholding that has already been applied. It is true that you can generally split the conversion and pay half the tax on the 2010 return and then half on the 2011 return, you will want to see if doing that is to your best interest. Do your 2010 return both ways (50% and 100%) and see if the 30% withholding is enough to cover for 2010 so you will not need to go through this process again for 2011 taxes.

Form 5498 is for informational purposes only and it is not to be filed with your tax return. The IRS received a copy of this form already.

I hope this additional information is helpful. What you completed was a conversion and not a rollover. It is true that you will not be penalized the 10% extra.

Expert:  Stephen G. replied 3 years ago.

Robin:

The option (election) is to report 1/2 the income in 2011 & 2012 not 2010 & 2011.

Customer stated he has deductions in 2010 to offset the income & therefore wants to report 100% in 2010.

No requirement to attach Form 5498, but this customer wants to provide additional information & there's no harm in doing so.

I hope with your comments (as modified) he is now satisfied that he won't wind up in the public stocks with 40 lashings.

Thanks for your help.

SEG

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