HOW DO I CORRECT A MISTAKE IN THE ONE TIME IRA ROLLOVER RULE

Submitted by Charles Robinson on Thu, 2013-04-18 18:31

BACKGROUND FOR QUESTIONS:

On January 28, 2013 I made a withdrawal from my Schwab IRA account. My intent was to use the money temporarily and return it to an IRA prior to the 60 day time line. However, I didn’t fully understand how the one time in 12 month rule worked. Although I thought of this as one transaction when I withdrew the money, I actually withdrew in two different amounts on the same day at the same time. In one transaction, I electronically moved $93,000 from my Schwab IRA to my Schwab One Brokerage Account. In the second transaction, I electronically moved $245,000 from my Schwab IRA to my Schwab One Brokerage Account. On March 1, 2013 I had Schwab send a check from my Schwab One Brokerage Account for $93,000 to First Onaga Trust to set up an IRA for the purchase of an Oil and Gas Drilling Partnership. On March 25, 2013 I had Schwab administratively move $245,000 electronically from my Schwab One Brokerage account back into the original Schwab IRA. I just discovered yesterday that I had violated the one time rule.

QUESTION # 1:

Can I choose which transaction to count as my one time Rollover or do I have to use the one that occurred first chronologically ? Obviously, if I could, I would choose the $245,000 and pay tax on the $93,000.

QUESTIN # 2:

Once I have selected which transaction to count as my one time Rollover, how do I correct the mistake with the taxable transaction ? What are the mechanics of removing the assets from the IRA ? Are there penalties other than paying the taxes ?

QUESTION # 3:

Is there anyway to correct this without paying taxes on one of the transactions ?

QUESTION # 4:

If I don’t correct this, what are the penalties IRS will levy if they discover it a year or two after I file my tax return ?



Submitted by Alan - IRA critic on Thu, 2013-04-18 19:35

  1. I would take the position that since your distributions were taken the same day, that you did not violate the one rollover rule, although to my knowledge the IRS has not defined what is meant by “later distribution”. While both your distributions went to the same taxable brokerage account, if you wanted to split a distribution between your checking account and the brokerage account, the transactions would have to be executed separately.
  2. To answer your Questions assuming these distributions were on different days, you could elect to pay tax on the 93k distribution to protect the 245k distribution. However, in doing so 93k would become an excess distribution and would have to be corrected by removal from the IRA. Just because 93k went to Onaga, that would not mean that you would have to withdraw that contribution. You could take the 93k plus earnings out of the Schwab IRA if you wanted to since these funds were commingled in your Schwab One account. You would tell Schwab you were not allowed to roll 93k of the 245k back to the account and therefore 93k is an excess contribution to be coded as such when distributed to you. You would report 93k as a taxable distribution as well as any earnings allocated to it. Both would be subject to the 10% penalty as well.
  3. Your Q 3 – not correcting it is the only way to avoid tax and penalty
  4. Your Schwab 1099R is going to report only the total 338k distribution along with any other distribution taken in 2013. You would just report that on 15a and 15b would be blank with “rollover” next to 15b.
  5. Note that you now have two IRA accounts (Schwab and Onaga) that both received rollover contributions. The 12 month waiting period applies to BOTH of those IRA accounts now and is measured from 1/28/2013, the date of the distribution.


Submitted by Charles Robinson on Thu, 2013-04-18 21:51

Thanks for the analysis, it has given me a lot to think about. One additional question: If I protect the $245 K and elect to pay tax on the $93 K, could I recharacterize the $93K First Onago account from a traditional IRA to a Roth IRA, allowing me to leave both the $245 and the $93K in an IRA and then simply pay the additional tax from other non-qualified monies ?



Submitted by Alan - IRA critic on Thu, 2013-04-18 22:40

  • Not now, but you could have done that had you realized you had a problem prior while the funds were still in your Schwab One. You could have converted one of the distributions and rolled the other one over. You could then have recharacterized the conversion back to a TIRA account. A conversion is not subject to the one rollover rule and therefore does not count as a distribution for that purpose. But after you already rolled over the second distribution the infraction has been committed and a conversion done after that does not undo a rollover that already occurred. Again, in your case I would consider your total distributions in a single day as a single distribution and not worry about it.
  • It would not change my recommendation either way, but I would feel a little better if your Schwab IRA January statement showed one total distribution on 1/28 instead of two. If it showed these on different days, then you have a problem.


Submitted by Charles Robinson on Fri, 2013-04-19 06:05

Thanks for the advice. I will check my January statement to see if it shows one or two. I know that when I go online and look at the “history” of that account it shows two entries on that day. However, I am quite certain they both occurred within minutes, perhaps seconds of each other which is why I mentally thought of it as one distribution in a single day.



Submitted by Charles Robinson on Fri, 2013-04-19 06:05

Thanks for the advice. I will check my January statement to see if it shows one or two. I know that when I go online and look at the “history” of that account it shows two entries on that day. However, I am quite certain they both occurred within minutes, perhaps seconds of each other which is why I mentally thought of it as one distribution in a single day.



Add new comment

Log in or register to post comments