By Sarah Brenner, JD
Director of Retirement Education
The rollover rules can be especially challenging at the end of the calendar year. If you took a distribution from your IRA at end of 2021 and are considering a rollover in 2022, here is what you need to know.
First, it is important to understand that it is possible to roll over a distribution from last year. Sometimes IRA owners have doubts as to whether a distribution taken in one calendar year can even be rolled over in the next. There is no problem with this! Nothing prevents you from taking an IRA distribution in December of 2021 and rolling it over in January of 2022 as long as you be sure to follow all the applicable rollover rules. You will want to be especially careful of the 60-day rule for rollovers during this busy time of year.
Another concern you may have is how to handle a distribution from your IRA in 2021 that you roll over in 2022 on your tax return. Do you report this transaction on your 2021 tax return or wait for 2022? Here is how it works: The IRA custodian will report the distribution from your IRA on a 2021 Form 1099-R. The rollover will be reported by the IRA custodian on a 2022 Form 5498. You will report the distribution and the rollover on your 2021 federal income tax return. Be aware that the 2022 5498 will not be released until early 2023! Thankfully, you do not need the 5498 to file your tax return.
Don’t fall for a common misunderstanding of the one-rollover-per-year rule. The rule says that you may only roll over one distribution from all of your IRAs in a one-year period. The one-year period begins with the date you receive the distribution you later roll over. The one rollover per year does not apply on a calendar year basis. A new calendar year does not mean you have a clean slate for purposes of this rule. If you take an IRA distribution on December 15 of 2021 and roll it over in January of 2022, you may not roll over another IRA distribution until December 15 of 2022.
If you are taking required minimum distributions (RMDs), there is another wrinkle. After taking your 2021 RMD, if you took an additional distribution in December of 2021 and rolled over those funds in 2022, you must include the amount rolled over in your December 31, 2021 fair market value when calculating your 2022 RMD. This rule prevents IRA owners from avoiding RMDs by having an IRA balance of zero on December 31. Any outstanding distributions are to be added back to the December 31 prior-year balance. You cannot escape your RMD by emptying out your IRA in December and then rolling over the funds in January.
Keep in mind that if you are establishing a new IRA with your rollover in 2022, your IRA custodian will not be reporting any 2022 RMD information to you (because they have no 12/31 balance). If you are rolling over to an existing IRA, the RMD amount the IRA custodian reports to you will be less than your actual RMD. This is because the IRA custodian reports RMD information to IRA owner based on the December 31 prior-year balance with no adjustments. You must make the adjustment yourself. Add the amount rolled over to the December 31 balance to calculate your correct 2022 RMD amount.