IRA Custodian Responsibilities
I made three IRA rollover distributions from the same traditional IRA account within a few month period. As a partial fix, on the third one I did a Roth conversion before cashing the check. I am now aware that only one rollover per year is allowed, and that I will owe tax on the second rollover.
The custodian is a large brokerage firm. Their first answer is that there is nothing they can do. They tell me that of the three conversations, their recordings say I was told on the second one that only one rollover can be done per year. If so, I didn’t hear it. No one asked me if I had done rollovers before, or checked my account to look for previous rollovers. No warning at all was given on the first or third request for a check, only the second one.
I am writing a letter to the brokerage company to ask for a further review of the situation. My local CPA and one of your Elite IRA experts tell me that the custodian has some responsibility here. Is that correct? Do you think I have legal recourse with the brokerage firm acting as custodian of my IRA account?
I understand that custodians can fix situations like this under some circumstances. Is this one of them? If so, any suggestions on what approach I should take with the custodian to get me out of this horrible fix?
Thanks for your help.
Permalink Submitted by Alan - IRA critic on Tue, 2013-08-13 00:49
The custodian could not fix the situation after the fact, and I know of no sanctions against custodians levied by the IRS for inadvertant oversight of this rule. There is also no relief provisions from the IRS for this infraction. Are all these IRA accounts with the same custodian? Some custodians, I estimate a large minority of them, might catch the second rollover, again more likely if it is a rollback to the same IRA that distributed it, as the distribution record is right there in front of them. If a different account issued the distribution or if another custodian made the distribution, much less likely to be caught at the receiving custodian level. One possible fix for you is to treat the largest distribution as the valid rollover and the smaller one as an excess contribution to the IRA and have it removed as a corrective distribution. You have you choice, in that you do not have to retain the first rollover if the second one is larger. The rules state that you are allowed only one, but it can be the larger of the two.
Permalink Submitted by Jose Morales on Tue, 2013-08-13 16:04
They can ask you questions that can help you determine rollover eligibility and many will provide you with a rollover certification form to complete when accepting a rollover, but this form is for you to certify to them in writing that the funds you are rolling over are in fact eligible for rollover. The IRA Custodian has no ability to independently validate the information provided on a rollover certification or any statements you may make verbally attesting to the eligibility to rollover the funds in question. However, if you did complete a rollover certification form or made some other attestation in writing that clearly let the IRA Custodian know that the second rollover was not eligible they do have a duty to not accept the rollover. Whether this situation would result in the IRS allowing you more than one rollover within a 12 month period is probably doubtful but if the financial damage from this mistake was great it may be worthwhile to seek compensation from the IRA Custodian.