60 DAY ROLLOVER ONE DISTRIBUTION PER IRA ACCOUNT

Submitted by MARK ROSEN on Fri, 2014-10-03 17:45

CLIENT HAS THE FOLLOWING SITUATION: HE HAS SHORT TERM NEED FOR $100,000. AFTER DISCUSSION WITH FINANCIAL ADVISER, HE DECIDES TO WITHDRAW THE FUNDS FROM IRA WITH INTENT TO PUT THE FUNDS BACK INTO IRA WITHIN 60 DAYS. ON AUGUST 29, $30,000 IS DISTRIBUTED TO HIM AND 2 BUSINESS DAYS LATER $70,000 IS DISTRIBUTED TO HIM FROM THE SAME IRA (IT’S UNCLEAR WHY IT WAS DISTRIBUTED THIS WAY).MY QUESTION IS: WOULD THIS BE CONSIDERED 2 SEPARATE DISTRIBUTIONS SUCH THAT THE SECOND DISTRIBUTION OF $70,000 WOULD VIOLATE THE ONE DISTRIBUTION EVERY 365 DAY RULE AND, THEREFORE, NOT BE ELIGIBLE FOR 60 DAY TAX FREE ROLLOVER TREATMENT? THANK YOU.



Submitted by Alan - IRA critic on Fri, 2014-10-03 19:51

Did client request a distribution of 100k and the custodian messed up, or did client ask for a distribution in separate requests? If separate requests, client is only allowed one rollover (if there were no other rollovers from the account in the prior 12 months). In that case he should roll back the 70k and keep the 30k. Since he is within 60 days, he can choose to roll back the larger distribution.



Submitted by David Mertz on Fri, 2014-10-03 20:23

Instead of just keeping the 30K and possibly incurring an early-distribution penalty, the 30K could be converted to a Roth IRA since a distribution from a traditional IRA that is rolled/converted to a Roth IRA is disregarded for the purpose of applying the once-every-12-months rule.  The tax would still be due, but there would be no early-distribution penalty.  Alternatively, one could roll the 30K over to a qualified retirement plan if one is available that will accept the rollover; this also would cause the 30K distribution to be disregarded for the purpose of applying the once-every-12-months rule.



Submitted by Alan - IRA critic on Sat, 2014-10-04 03:31

Good suggestion from DMx. You could take the conversion one step farther if you don’t want it. Convert and then recharacterize and the distribution that was converted is back in your TIRA with no tax consequence.



Submitted by David Mertz on Sat, 2014-10-04 12:31

I thought about recharacterizing, but this is one case where I disagree with Natalie Choate and her suggestion in her best-/worst-ideas paper about doing this.  Regarding the contribution transferred in such a recharacterization, section 408A(d)(6)(A) says, “such contribution shall be treated as having been made to the transferee plan (and not the transferor plan).”  Note the past tense.  I interpret this to mean that the contribution will be treated as having been made to a traditional IRA (a rollover) on the date when the contribution was originally made to the Roth IRA (the converison).  Taken literally in this way, the recharacterization would create a violation of the once-per-12-months rule in this instance.  Personally, I wouldn’t risk it.



Submitted by Alan - IRA critic on Sat, 2014-10-04 20:20

Q&A 8 of this IRS Reg appears to override your concern:    http://www.law.cornell.edu/cfr/text/26/1.408A-5



Submitted by David Mertz on Sun, 2014-10-05 03:16

I can certainly see where 1.408A-5 Q&A 8 says that the recharacterization itself (distribution from the Roth IRA and transfer to the traditional IRA) would not be considered a rollover, but I’m a bit less convinced that Q&A 8 indicates that the original conversion would not revert to being a rollover.  Perhaps I’m being overly cautious.  I would be happier with it if the Q&A explicitly indicated that the original contribution would remain disregarded.  On the other hand, I can see where if the intent was that the original conversion would not be disregarded as a result of the recharacterization, that probably would have been explicitly stated in Q&A 8.  I would be much happier if A-8 read, “No, a contribution recharacterized under A-1 of this section is never treated as a rollover contribution … ,”  making reference to the contribution rather than the act of recharacterizing.



Submitted by David Mertz on Mon, 2014-10-06 01:09

  • I found I.R.B. 1998-39 (http://www.irs.gov/pub/irs-irbs/irb98-39.pdf) which may shed some light on the intended meaning of 1.408A-5 Q&A 8 and appears to support my concern.  The second paragraph on page 37 describing the proposed §1.408A-5 includes:
  • “Under the proposed regulations, a taxpayer may elect whether to recharacterize a contribution made to one type of IRA by having it transferred in a trustee-to-trustee transfer to a different type of IRA.  As with a conversion, a recharacterization can be effected simply by transferring IRA assets between two IRAs of a single financial institution.  Regardless of how effected, a recharacterization transfer is not considered a rollover for purposes of the one-rollover-per-year rule of section 408(d)(3).  …  A recharacterized contribution will be treated for Federal income tax purposes as having been contributed to the transferee IRA (rather than the transferor IRA) on the same date and for the same taxable year that the contribution was initially made to the transferor IRA.  In effect, the transferee IRA “steps into the shoes” of the transferor IRA with respect to the taxpayer’s original contribution.”


Submitted by Alan - IRA critic on Mon, 2014-10-06 02:41

The quote itself states the exemption of rollover treatment from the general statement that the contribution is considered made to the transferee IRA. It seems very clear and direct. Further, if this was interpreted as you surmised, any conversion done within one year of a rollover could not be recharacterized, nor could a rollover be completed within one year of a recharacterized conversion, which can be done as late as 21 months after the original contribution, resulting in the total look back period being as long as 33 months. The IRS has never taken that view. Flexibility would be further curtailed with the new rollover restrictions effective 1/1/2015. In addition, the one rollover rule in practice has been administered by IRA custodians by refusing to accept rollovers considered to violate the one rollover rule, and none of the custodians has been reported to have taken this view either.



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