Bank Miscoded Wife's IRA Deposit - Ed Slott and Company, LLC

Submitted by John Gray on Thu, 2016-10-20 15:35

I gave my wife my personal check to deposit into her IRA at a bank. The check was for $6500 but should have been for $5500 because that was the max for her age. The money did not come from my IRA, nor did it come from her IRA. We maintain separate accounts. Neither of us made any IRA withdraws within the preceding year.

Because the check was over the maximum amount for the deduction, the banker decided to code the deposit “reinvestment credit”. That, of course, caused us to lose the deduction on our 2014 tax return. Our accountant didn’t catch it.

The point to my bank is that it was impossible that the deposit was a rollover because it was MY personal check made out to the bank. I can prove that my personal check was deposited into her IRA account. The bank is simply ignoring this issue, which is the most important and relevant issue.

The IRS says on its website: “If a distribution from an IRA or a retirement plan is paid directly to YOU, YOU can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you’ll have to use other funds to roll over the full amount of the distribution.”

Does anyone know language in the Code that supports the point that the IRA owner has to make the deposit into the IRA for the deposit to be a rollover? Thanks!!

Flag as spam

Permalink Submitted by Alan - IRA critic on Thu, 2016-10-20 17:14

I am not aware of any IRS guidance on who has to make the deposit. Checks signed by other than the IRA owner are routinely accepted for regular contributions, but obviously much less so for rollovers, and banks may have their own internal policies for that. The bank should have contacted your wife about the excess $1,000 immediately instead of arbitrarily changing a regular contribution to a rollover contribution when the contribution was not presented as a rollover. In addition, the amount was exactly equal to a regular contribution including catchup making it that more likely that it was not a rollover contribution.
The bank made a bad decision, but it was not detected by anyone in time to make a simple correction. There is no benefit in coming up at this point with another reason that their arbitrary action was unwise, so I would forget the issue of who signed the check. Instead, I would focus on the most efficient way to correct the error before the IRS sends an inquiry.
I can help with the correction issue but need more info – your 2014 return apparently has a deduction on it, and you do not necessarily lose that. I assume no rollover was reported because there wasn’t one no matter what the bank did. Does your wife qualify for a 5500 deductible contribution for 2014 (income limits etc)? If so, she has a bona fide regular contribution with or without the correct 5498 from the bank because a failed rollover is TREATED as a regular contribution (possibly excess) by the IRS rules.
Because she has at least a 1000 excess regular contribution for 2014 which was not corrected by the due date, she owes a 6% excise tax on that on a 2014 5329. For 2015, it depends on what her IRS status was for 2015, you would need to clarify if she made a contribution for 2015 and also for 2016. This is all worked on Form 5329, but if the excess amount cannot be applied to 2015, another 6% is owed for 2015. Then the 1,000 needs to be withdrawn before 12/31 to avoid yet another excise tax for 2016.

Permalink Submitted by David Mertz on Thu, 2016-10-20 17:21

The tax code is silent regarding the source of funds that are deposited to an IRA, other than to require that new contributions be in cash and that, in the case of a rollover, the property rolled over must be the same as that distributed from the old IRA. In this case, the property is cash and your check is equivalent to cash. The fact that the check was drawn on your account and deposited into you wife’s IRA does not itself preclude the deposit from being a rollover contribution.
The coding provided by the IRA custodian is intended to *report* the nature of the contribution. For the most part, it does not *determine* the nature of the contribution. The nature of the contribution is determined by whether or not the contribution is made by end of the 60-day deadline from when an eligible rollover distribution was made and how you report the contribution on your tax return. Of course if the coding provided by the custodian does not agree with how you report it on your tax return, the IRS may question the transactions involved but it generally does not change the nature of the transactions.
Since your wife made no IRA distribution that was eligible for rollover, the nature of the $6,500 contributed to her IRA can only be a new contribution. Given that the custodian coded it incorrectly, if the contribution was made between January 1 and April 15, 2015 and was intended to be a contribution for 2014, the lack of being designated as a regular for 2014 means that this contribution defaulted to being a regular contribution for 2015 instead (the case where the coding *does* affect the nature of the transaction).
If your wife had not reached age 50 in the year for which the contribution is made, she has a regular $5,500 contribution for that year and a $1,000 excess contribution for that year. This excess is subject to a 6% excess contribution penalty for each year in which the excess remains. If this contribution was intended for 2014, ended up being a 2015 contribution by default, and she made an additional contribution for 2015, she has even more of an excess contribution for 2015 (but no excess contribution for 2014).