IRA tax-deferred rollover becomes a taxable withdrawal? Form 5498 to the rescue.

When a taxpayer rolls over their IRA/401(k) they receive a check from the old IRA/401k trustee (They will also issue a 1099-R, with code 7, Normal distribution if over age 59 1/2. The taxpayer normally gives the check to new trustee within 60 days to preserve tax deferral. However even if all of this is done correctly the IRS will write and say the rollover is a distribution. Not good when the taxpayer is at lower marginal tax rates with taxable Social Security benefits. This is what we call the ‘tax trap trifecta’; Additional income generally increases Social Security benefits taxed which can put in new marginal tax brackets.

To avoid this the IRS will ask you for your Form 5498 Copy B which the new IRA issuer already sent to the IRS as Copy A. Anyway, proving that you have a copy of Form 5498 or similar evidence or a rollover should ensure the distribution remains a rollover and your tax liability becomes deferred again.

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