Pub. 1 2020 Issue 6

17 ISSUE 6 | 2020 considered part of the conversion. Thus, it is subject to the 10% early distribution penalty tax if the IRA owner is under age 59½. When an IRA owner requests and receives a Traditional or SIMPLE IRA distribution (the check is made payable to the IRA owner) and she deposits the amount in a Roth IRA within 60 days after the date of receipt, the conversion was done indirectly. Because of the disruptions caused by the COVID-19 pandemic, the IRS issued Notice 2020-23 to extend the deadlines certain time-sensitive tax- related actions. An indirect conversion that needed to be redeposited between April 1 and July 15, 2020, to satisfy the 60-day window was permitted to be delayed until July 15, 2020. Another option, if within the same financial organization, is to “redesignate” the Traditional or SIMPLE IRA as a Roth IRA. The IRA owner must complete a new IRA application that identifies specifically what type of IRA is in existence (i.e., Roth IRA). Redesignating a non-Roth IRA as a Roth IRA does not require the investment instrument to be closed or surrendered. All banking, insurance, state, and federal laws still must be taken into account when considering the redesignation approach. Reporting All IRA distributions being converted are reported on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. For a direct conversion, either code 2, Early distribution, exception applies (for IRA owners under age 59½), or code 7, Normal distribution, must be shown in Box 7. If an IRA owner under age 59½ withholds on a distribution that is directly converted, the distribution must be reported on two Forms 1099- R. One Form 1099-R reports the direct conversion amount using distribution reason code 2, and the second Form 1099-R reports amounts withheld for taxes using code 1, Early distribution, no known exception (for IRA owners under age 59½). Because amounts withheld are not converted, they are considered distributions to the IRA owner and — as previously noted — are subject to the 10% early distribution penalty tax, unless a penalty tax exception applies. Alayna Drope, Ascensus For more than 40 years, Ascensus has delivered comprehensive IRA and HSA solutions. The firm’s solutions offer capabilities to streamline operations while maintaining regulatory compliance. Call me at 480.259.8280 Tracy Peterson Based in Ariz. covering Arizona, Colorado, Kansas and Missouri Together, let ’s make it happen. Leverage our large lending capacity, up to $20 million on correspondent loans. Our lending limits are high enough to accommodate what you need, when you need it. We do not reparticipate any loans. Member FDIC 24848 Commercial & ag participation loans Bank stock & ownership loans Bank building financing Business & personal loans for bankers Why choose Bell as your bank’s lending partner? For an indirect conversion, either code 1 or code 7 is used in Box 7. Financial organizations that receive a direct or indirect conversion report the amount on Form 5498, IRA Contribution Information, in Box 3, Roth IRA conversion amount. Although physically accomplished through an internal transfer, redesignations must be reported as distributions on Form 1099-R and conversion contributions on Form 5498. Documentation Ensure that your organization has captured the required information — eligibility, client elections, etc. — by using transaction forms. Understanding the conversion requirements and having the written documentation to support each transaction will help your organization handle conversions with confidence and efficiency. 