Rollover or Transfer? Why the Difference Matters

Your clients may receive a letter from the IRS stating that they didn't report income from a qualified policy they closed in that year. Typically, this happens because of the source of money indicated on their application. Selecting either a Rollover or Transfer determines how the initial premium is eventually reported. Here are the key differences:

Rollover

A rollover is movement of funds between unlike policies. For example, closing out a Pension account and moving those funds into an IRA is a rollover. Rollover contributions to IRAs, Roth IRAs and SEP IRAs are reported annually to the IRS on Form 5498. Conversions and re-characterized contributions are reported on Form 5498 as well.

In addition, funds that the clients receive and deposit into a checking or money market account while they research investment are rollovers. This is true even if the banking institution sends The Standard a cashier's check or money order for the benefit of the client. Remember, rollovers are reported to the IRS on Form 5498 indicating that the money was deposited into a qualified policy and is not taxable.

The Standard reports rollover contributions to the IRS in May of each year. The previous carrier issues a 1099R reporting the rollover by using a distribution code of G and showing no taxable amount. A few carriers may send the funds directly to the client which should be reported as fully taxable on the 1099R and coded as a 7 or 1 depending on the client's age. If these funds fail to make it into another qualified account within 60 days, or are not recorded correctly, they become taxable and considered income.

Transfer

Transfers are funds between the same types of policies and are not reported on Form 5498. An example of a transfer would be moving funds from an IRA with a bank to an IRA with The Standard. For funds from a bank or credit union to be considered a transfer they must originate from a qualified IRA account held at the bank or credit union.

Indicating Money Source on Applications

During the review of application paperwork, we look to see if money source marked on the application matches the type of premium received.

• For an IRA application with the money source listed as a New Investment, we review the amount received against the IRS maximum contribution.
• Money sources listed as Transfer, New Investment, or not marked will require a review of the check itself.
• If the check is from a bank or credit union, then we treat it as a Transfer until told otherwise. Most checks from financial institutions do not indicate if funds are a rollover or transfer.

If you have questions or need help providing service to your clients, please contact our Service Specialists at 800.247.6888 or Send Us a Message. This article does not constitute tax advice.