One-Rollover-Per-Year rule: Dating?
Here’s a question that I have not been able to find the answer to:
Taxpayer has an IRA #1, which he takes a distribution from and rolls over the funds to IRA #2 on 1/30/2009. On 1/23/2010, he takes a distribution from IRA #2 and wishes to make a rollover into IRA #3.
Clearly, if he made the rollover deposit to IRA #3 on 1/23/2010 he would be in violation of the one-rollover-per-year rule. But if he waited until 1/31/2010 or later to make the deposit, would this satisfy the one-rollover-per-year restriction? What I don’t know for sure here is if the “rollover” is occurring when he makes the deposit to IRA #3 or if it is when he takes the distribution from IRA #2.
Thanks in advance for any insights to this matter.
Permalink Submitted by Alan Spross on Tue, 2010-12-28 23:15
The one year waiting period is always measured from the date of distribution, not the date the rollover is completed. Therefore, taxpayer had to wait until 1/31/2010 to take the distribution from IRA #2.
Ref Pub 590, p 24.
Permalink Submitted by James Blankenship on Tue, 2010-12-28 23:28
Thank you Alan. Your knowledge and insights are always appreciated.
What Pub 590 makes clear is when the 12-month clock starts ticking (upon receiving the distribution), but since the intent of the distribution from the second IRA isn’t clear until the deposit is actually made, it wasn’t clear (at least to me) if the timing on the deposit was the trigger or the timing of the withdrawal was the trigger.
Again, I appreciate your knowledge and insights.
Permalink Submitted by Alan Spross on Wed, 2010-12-29 02:07
While the time period is measured between distribution dates, in the case where a taxpayer has not allowed enough time as in your example, they DO have a choice to complete the second rollover and not to claim a rollover on the first distribution. This could be useful if the distributions were for vastly different amounts as it would allow the larger amount to be rolled over in exchange for the smaller amount to be considered taxable. To complete that kind of decision, taxpayer would have to withdraw the smaller amount rolled over as an excess contribution to the IRA since obviously both amounts could not remain in the IRA. The smaller distribution would become taxable, and the correction of the excess contribution that contained earnings on that contribution would be taxable only to the extent of the earnings. The 10% penalty would also apply if there was no penalty exception.
There is also a better way out of this dilemma. If the taxpayer did a rollover and then took out another distribution intended for rollover before the year was completed, instead of being stuck with one of them being taxable, the taxpayer could convert the second distribution to a Roth IRA and then recharacterize the conversion back to a TIRA. Roth conversions do not count as rollovers so this is a back door way to escape from the problem and preserve the entire balance in a TIRA.
Permalink Submitted by James Blankenship on Wed, 2010-12-29 13:07
Thanks again, Alan, for your valuable insights.