indirect IRA rollover
If I want to roll money from a 401k or IRA to another IRA, I have 60 days to complete the rollover if I have received the rollover from IRA #1 as a distribution. I understand that I cannot roll money out of IRA #2 for 12 months.
Does anyone know if I can then do a second rollover from the 401k or IRA #1 to IRA #3 withing the same 12 month period?
A collegue has told me that you are only allowed one indirect rollover per person in a 12 month period. My understanding is that it’s a restriction per account not per person?
The goal is to allow a client access to rollover assets for more than 60 days. Assets are currently held in a 401k and they already have a loan from the 401k. So we are looking at an indirect rollover to an IRA followed by a second rollover to IRA #2 then IRA #3 and so on. The money for the rollover to IRA #2 would actually be used to complete the Rollover to IRA #1 because the money in froim the first rollover will be used by the client. So the second rollover will actualy be done to complete the first rollover.
step 1
Rollover #1
$50k indirect rollover/ distribution from 401k to client
step 2
Rollover #2
second 50k indirect rollover/ distribution w/ in 60 days.
This 50k is used to complete the first rollover. So now IRA #1 has a copmpleted $50k rollover
Step 3
Rollover #3
Third 50k indirect rollover/ distribution w/ in 60 days of second rollover (step 2). This completes rollover #2.
Step 4
Client now uses assets from income or other non-qual resource to complete Rollover #3
End result: client has three new, separate $50k IRAs all with completed indirect rollovers and had use of the original $50k for longer than 60 days.
Any problems w/ the above scenario?
Thanks in advance for your help.
Permalink Submitted by Joseph Arsenault on Thu, 2010-06-17 21:31
I’ll admit I had hard time following your question.
The basic 12 month rule is that any accounts (IRAs) involved in a 60 day rollover cannot have money distributed FROM them for 12 months. So if IRA 1 indirectly rolls to IRA 3, any distributions from those 2 accounts for the next 12 months are deemed distributions (taxable). You could have more money roll to them from a different account, you just cant have any money come out of them as a “distribution”.
What confuses me is how you kept saying “or” instead of clearly defining your fact pattern. I am assuming you are asking, can you do 3 indirect rollovers from from one 401k to 3 different IRAs within 12 months? My understanding is that this would be ok, as the 12 month rule applies for IRA to IRA. Maybe alan or someone else can confirm this however as I am not 100% positive about that.
Permalink Submitted by mk foss on Thu, 2010-06-17 22:00
I haven’t heard the term “indirect rollover” but you are correct in stating that the 60 day limit is per account per year.
IRS Pub 590 gives and example where there are 3 IRAs and amounts can go from one to another.
I have a client who at times will take an IRA distribution from IRA #1 when he’s short of funds – when the 60 days is about to expire; he may take a distribution from IRA #2 to repay IRA #1 – then he will have 60 days to repay the 2nd one. This can go on and on. He has more than 12 IRAs and always completes the “rollover” within 60 days.
I didn’t completely follow your fact pattern, but I hope the above information is useful.
Permalink Submitted by Joseph Arsenault on Thu, 2010-06-17 22:07
An indirect rollover is an erroneous term for a 60-day rollover.
Permalink Submitted by Alan Spross on Thu, 2010-06-17 23:13
Here is the definition of an Indirect Rollover:
http://www.retirementdictionary.com/definitions/indirectrollover
For IRA accounts created by rollovers FROM a 401k plan, there is no problem with each of them making one distribution rolled to another IRA account because each account did not RECEIVE a prior rollover FROM an IRA, nor did each account make more than one distribution that was rolled to another IRA account. Not sure if the actual example meets these requirements, but as Mary Kay’s reference to the Pub 590 example illustrates, a multiple IRA rollover strategy can be carried out without violating the one rollover rule, if it meets the requirements.
That said, there are a couple other possible issues with the plan:
1) With respect to a 401k plan that already has an outstanding loan, taking any distributions from the plan that reduce the account balance below the 50% needed for security for the loan would likely trigger a deemed distribution of the loan.
2) Distributions from a qualified plan that are not done as direct rollovers require a 20% mandatory withholding. These funds go to the IRS and therefore the IRA balances would be short of the amount needed to complete the rollover “chain”. These dollars can be replaced if you have other assets to supply the cash that was diverted to withholding.