IRS distribution nightmare!
I am in need of some advice and am hoping you can help. A relative of mine has taken multiple distributions from her IRA with the though of rolling it over into another IRA (long story). She is 60 1/2 years old and is not working. The 4 distributions are as follows. (On 8/10/2008 $46255.01), (On 8/12/2008 $49323.22), (On 8/15/2008 $49999.99), (On 8/28/2008 $49999.99). She is in the process of depositing $100000.00 into the new IRA. What are her options? Does she have any? Whay do you think the best course of action is? It seems that she is in a pickle. Any help or insight would be greatly appreciated. Thank you very much in advance.
Permalink Submitted by Alan Spross on Mon, 2008-09-08 23:02
She took out almost 200,000, but only intended to roll over 100,000?
As you probably know, she can only roll one of those distributions over due to the 12 month waiting period. That leaves 50,000 taxable in addition to what she apparently intended.
Options:
1) Requesting a PLR if there are any extenuating circumstances related to mental or physical problems.
2) Don’t suppose the old custodian is an insolvent financial institution?
3) Perhaps certain Roth conversions are an answer since these are taxable and do not require a waiting period. Of course, her modified AGI must be under 100,000, and the amount she wanted to retain alone is near that figure. This would require converting even more to get the income under 100,000 and the tax bill would mount. She could not just convert and then recharacterize right away back to the TIRA without the IRS considering this a step transaction to get out of paying the taxes, however, if she lets some of them stay in the Roth awhile before recharacterizing, the strategy probably works, but this is pretty aggressive.
Permalink Submitted by J Lagoo on Tue, 2008-09-09 00:00
She intended to rollover the entire amount into the new IRA and thought the only rule was the 60 day rule (unaware of the 1 per 12 month rule) . So now she has unqualified excess that is rolling into the new IRA. What is required for a Roth conversion of the unqualified 150,000; as she is still within the 60 day period? Is the intended Roth rollover amount included into her yearly income?
Thank you very much sir for your knowledge and wisdom.
Permalink Submitted by Alan Spross on Tue, 2008-09-09 00:50
Until 2010, modified AGI must be under 100,000 to convert. However, the amount of the conversion itself DOES NOT COUNT in determining the modified AGI. Therefore, each dollar of conversion reduces the modified AGI from the distribution and there may be point at which the modified AGI of what is left falls under 100,000. Of course, if she has 100,000 of income not counting the IRA distributions, then the conversion plan is a no go.
Remember, the conversion is taxed, so she will needs funds to pay the taxes for the conversion in the same manner as if she was just stuck with a 150,000 distribution. But the Roth will earn tax free and will not be subject to RMDs. This obviously works better for someone who has the total amount of assets to benefit by it, ie a conversion is of no benefit if the marginal tax rate in retirement will be lower than prior to retirement.
To do a Roth conversion, the amount must be rolled into a Roth IRA account within 60 days of distribution.
Unfortuneately, there have been plenty of IRS rulings allowing the 60 days to be extended for rollovers, but virtually nothing to relieve the error of multiple distributions from the same IRA account negating rollover ability.
Why did she distribute 4 different days rather than all at once?
Permalink Submitted by J Lagoo on Tue, 2008-09-09 01:47
Her income is well below 100,000 so I believe it is doable. Just to verify; the 100,000 AGI limit is for her and spouse correct?
She took out the 4 distributions because she was ignorant of the rules and followed incorrect advise from a friend who is a financial advisor.
Thank you again so much for your time and wisdom.
Permalink Submitted by Alan Spross on Tue, 2008-09-09 01:55
Yes, the 100,000 limit is for the joint return of both spouses. And no conversion allowed if they file separately.
Permalink Submitted by J Lagoo on Tue, 2008-09-09 02:34
Thank you for your time alan-oniras. For the information and help you have extended to me I am grateful.
James