One rollover per year rule

Submitted by Brad Hankins on Wed, 2016-11-30 01:50

I was unaware of the 2015 one-rollover-per-year rule and recently contacted the trustees of two separate IRA’s that I own. One is a Traditional IRA, the other is a Simple IRA over 2 years in place. I have no rollovers in the previous 12 months. I contacted the trustees on the same day and requested that the funds be wire transferred to my personal account. The two amounts show on my bank statement 2 days apart due to processing time of the different trustees. I’m still within the 60 day rollover period. I’m 54 years old and still employed so taxes and penalties could come into play. I’ve gotten conflicting information in researching the one-rollover-per-year rule. Please help.

– I’d planned to write ONE check for the total amount and deposit it into ONE new IRA. Will this be considered one rollover since both checks were received and deposited within the same 60 day period? If so, I’m done.
– If it is considered 2 rollovers, which one is disallowed?
– If it is considered 2, is converting one to a ROTH and later having it recharacterized my best option?



Submitted by Alan - IRA critic on Wed, 2016-11-30 02:06

There were two distributions since different accounts were involved. As it stands, you can only roll over one of them to another TIRA, but you can convert the other one. You are correct that a Roth conversion is an escape hatch for this error, and you can recharacterize the conversion if you want to as well. Fortuneately you caught this before you rolled both distributions to a TIRA. It does not matter which distribution you convert to a Roth IRA. In the future if you want to move funds to different IRAs, it is best to do so by direct trustee transfer, as direct transfers are unlimited.

Submitted by Brad Hankins on Wed, 2016-11-30 14:53

 I’ll do just that today.  Thank you very much for the insight  

Submitted by Brad Hankins on Thu, 2016-12-01 00:06

Once I convert the TIRA to a ROTH, are there any issues with the “step transaction doctrine” when I later recharacterize it?  I’m very unfamiliar with this topic.  I’ve read a little and I just want to make sure I follow all the right procedures. 

Submitted by Alan - IRA critic on Thu, 2016-12-01 00:25

There are no issues. You have an unlimited right to convert and recharacterize. This work around has been available for many years and the IRS has never questioned it to my knowledge. That includes those that have done this for amounts many times in excess of the amounts you are probably working with.

Submitted by Brad Hankins on Thu, 2016-12-01 01:16

Sound great.  Thanks again for the insight and help.

Submitted by Brad Hankins on Thu, 2016-12-01 19:28

I’m feel certain I’ll receive two 1099R forms for 2016 since I had funds from from two IRA’s wire transferred into my personal account.  One was a Simple IRA, the other  a TIRA.   These are the steps I’ve  completed; – 11/18/16 (50 days) Rollover for the first distribution from the Simple IRA to a TIRA – 11/27/16 (59 days) Tax Quailified Conversion and Rollover from the TIRA to a ROTHDoes this appear to be everything I need to have done?  Should I wait until after 4/15/16 to recharacterize the ROTH?  Finally, do you think the two 1099R’s will cause an audit or simply an explanation?                                                  

Submitted by Alan - IRA critic on Thu, 2016-12-01 19:51

When you recharacterize a conversion, you need to complete an explanatory statement with your return explaining the date and amount of the conversion and the date and amount transferred back to the TIRA upon recharacterization. That will explain to the IRS that you converted instead of doing a second rollover.  If your conversion has gains, you may not want to recharacterize. In that case, the conversion will be reported on Form 8606 and you would not need to include a statement. No reason for there to be an audit unless some unrelated issue on your return triggered one.

Submitted by Brad Hankins on Thu, 2016-12-01 20:17

The gains will be minimal on the ROTH as the vehicle for it is a fixed annuity. The dollar amount of the TIRA that was converted to the ROTH is relatively large. If I don’t recharacterize it, the taxes on the conversion will be on top of my regular income if I’m not mistaken.  The recharacterization is pretty certain.  In that case I’ll just need to do the explanatory statement right?  I’d like to recharacterize the ROTH before 4/15/16 just to wrap everything up for 2016.  Is that wise or should I file for an extension for 2016 and do it before the 10/15/16 deadline?   

Submitted by Alan - IRA critic on Thu, 2016-12-01 22:28

  • If you are very sure that you are going to recharacterize, I would do it before you file your taxes so you will have the data to include on the explanatory statement. For example, if you recharacterize by late March you will have the info for the statement when you file in April. If you were going to wait into the summer, then you would probably file an extension. Note that the 1099R for the recharacterization will not be issued until Jan, 2018 if you recharacterize next year, so your statement is the only way the IRS would know that you recharacterized.
  • If you recharacterized before this year end, then the 1099R would follow in January, so the IRS could tell you converted and your explanatory statement would be less critical.
  • Probably not a good idea to convert to an IRA annuity as recharacterization could be problematic for the insurance company and could add surrender or other fees. An annuity IRA is usually in it’s own account so you would have no choice but to move the annuity to the TIRA in the recharacterization transfer.

Submitted by Brad Hankins on Thu, 2016-12-01 22:54

I’ve spoken with the insureance company already and they say they will do the recharacterization and issue a new contract at that time.  They will waive the surrender charge if I leave the new TIRA with them.  So now, I’m making sure I follow all of this.  So my two distributions will each generate a 1099R to the IRS from my previous IRA trustees. 

  • I’ve completed one IRA rollover to a new IRA trustee
  • I’ve completed on conversion from TIRA to a ROTH and rolled in over to a new IRA trustee
  • I recharacterize the ROTH before 4/15/16  
  • On my 2016 return, basically I’ll include an explanatory statement stating that in 2016;  I did one IRA rollover, one IRA conversion, and one IRA recharacterization

Is that correct?  Do my new trustees issue 1099R forms for the new rollover, conversion, & recharacterization? 

Submitted by Alan - IRA critic on Fri, 2016-12-02 01:15

  • On your second bullet point, please clarify whether you converted directly to the IRA annuity or converted to a different Roth and then moved the funds to the insurance company holding the annuity. Third point, you would need to recharacterize well prior to 4/15 to provide time to complete the recharacterization transfer and then to get your taxed filed by the 15th. This depends on who or how you intend to file so is just a general need to provide enough time for all of this. I would order the recharacterization no later than mid March.
  • The explanatory statement does not mention the non Roth rollover, only the date and amount of the conversion and the date and amount of the recharacterization including what the amount was worth when it was transferred to the TIRA annuity. In other words, this explanatory statement would be no different than for someone who did just  a conversion and recharacterization. Forget the other rollover, since that will be obvious from your return.
  • IRA custodians will issue a 1099R form to report the recharacterization transfer and the receiving custodian will issue a 5498 to report the recharacterization contribution, but some of those forms will not be issued till Jan, 2018.
  • For your 2016 return you will report the total distribution amounts you rolled over (total of both 1099R distribution forms)  on line 15a of Form 1040. Line 15b will be blank and “rollover” entered on the line next to 15b. No tax will be due. And of course the explanatory statement as indicated. Do NOT report the conversion on Form 8606 or the recharacterizations other than in the statement). Again, the recharacterization 1099R forms will not be issued until 2018, but will be coded to show that you recharacterized a 2016 conversion.

Submitted by Brad Hankins on Fri, 2016-12-02 03:11

The original TIRA was converted directly to the IRA annuity 

Submitted by Alan - IRA critic on Fri, 2016-12-02 04:30

OK, just wanted to be sure.

Submitted by Brad Hankins on Fri, 2016-12-02 14:15

You’ve been a tremendous help. Thanks again! 

Submitted by Brad Hankins on Wed, 2016-12-07 22:56

Since running into the new one-rollover-per-year situation, I’ve had several conversations with others about it with virtually none of them being aware of the rule. That brought up a question.  I was able to get my problem corrected because I was within the 60 day period.  My question is this.  Lets assume;  1. Not knowing the new rule, I had deposited both distributions from the TIRA and the SIRA into one new TIRA  2. That deposit was made well within the 60 day period (no add’l 60 day period was used) 3. The daily bank balance on my personal account could prove that no short term loan was made while the money was in my account.  4. I’ve paid into my aggregate IRA’s every year for 20 years plus and have never made an indirect rollover before  5. I’ve never made an early withdrawal or loan on any of my IRA’s.  6. I’m under 59 1/2 and employed.  If I were audited because of the two 1099R’s that would be issued, would the IRS likely consider the information listed above and allow the IRA to remain?  Or, would the IRS likely impose the penalties of that distribution becoming taxable income, a 10% penalty, a 6% penalty for the second distribution being deposited into the new IRA, (amounting to over 50% of the second distribution and a 6 digit tax burden) as well as the loss of IRA status for that distribution?I know you can’t say with certainty. I’m asking what would be the “likely” outcome.    

Submitted by Alan - IRA critic on Thu, 2016-12-08 00:03

  • You are correct that if this new interpretation was aggressively enforced, the consequences would be dire. While the IRS can extend the 60 day rollover time limit, they have NO authority to waive the one rollover rule. Perhaps that is the reason they used to apply the rule “per IRA account” rather than collectively, but they discovered that too many people were using IRAs for loans, even long term loans in some cases such as the Bobrow case which triggered the change in interpretation.
  • If the new interpretation was enforced, all rollovers done within 12 months after the one allowed rollover would be taxable, subject to the 10% penalty if IRA owner was under 59.5. Further, the rollover contribution would be an excess IRA contribution that would have to be removed by the extended due date with allocated earnings. The earnings would be subject to tax and penalty if over 59.5. And once the deadline to correct the excess passes a 6% excise tax per year applies to the excess contribution and there is no statute of limitations on excess contributions. And if any other penalties such as late interest or failure to report large amounts of income were levied, it could pretty much drain an IRA if the disallowed rollover amount was large.
  • It is possible that the IRS did not enforce the liberal interpretation of the rule due to the severity of the penalty. But making the rule that much tougher just digs a deeper hole. No telling how this will turn out. To date I have not heard of anyone reporting becoming a victim yet.
  • Read this article by Natalie Choate written just after the new interpretation was announced: http://www.morningstar.com/advisor/t/91694282/rollover-rule-change-will-cause-trouble.htm?

Submitted by Brad Hankins on Wed, 2016-12-14 23:27

I need some help on the timing concerning the 60 day rollover period. 

  • 9/23/16 I made phone request for funds from my Simple IRA (over 2 yrs) to be wired to my personal account.
  • 9/27/16  The funds were received in my personal account per bank statement.
  • 11/18/16  I gave a check to the new trustee for an IRA annuity and received receipt.
  • 11/21/16  Due to the weekend, new trustee made actual deposit into their account.  
  • 11/25/16  The funds cleared my personal account per bank statement.
  • 11/27/16  Date shown as “policy date” on new IRA annuity.

As far as the IRS is concerned, when did the 60 day period begin and end?Can the 11/27/16 “policy date” cause me any problems?         

Submitted by Alan - IRA critic on Wed, 2016-12-14 23:46

The 60 day period started on the day after the date you received the distribution, so the first day was 9/28/16. The rollover contribution had to be received by the IRA annuity custodian by the 60th day or 11/26/16. The IRA annuity custodian received the rollover check on 11/18, so you met the deadline with 8 days to spare. It does not matter that it took the custodian 9 days to issue the annuity contract.

Submitted by Brad Hankins on Tue, 2017-04-18 21:20

Hey Alan, It’s been quite a while since my last update on this subject. Due to surrender charges from the insurance contract that I used to converted the TIRA to a ROTH, I ended up having to wait 6 months before I can recharacterize.  That puts me into June of 2016 before I can recharacterize.  That’s well before the 10/15/2016 deadline but after April 15 so I had my CPA file for an extension.  Do I need to do anything additional due to filing the extension or just include the explanatory statement with my return once we file it?  I’m planning on filing in June immediately after recharacterizing the ROTH back to a TIRA.

Submitted by Alan - IRA critic on Tue, 2017-04-18 23:30

I think you mean 2017, not 2016. Just include the explanatory statement for the recharacterization on the extended return. You were supposed to pay your expected tax bill with the extension, but the CPA would know that. The expected tax bill would not include conversion taxes because you are going to recharacterize the conversion.

Submitted by Brad Hankins on Wed, 2017-04-19 18:33

Yes sir I did mean 2017.  Sorry about that.  And yes, my CPA did give me the amounts owed and transmittals to submit for both my federal and state taxes assuming the recharacterization of the conversion.  I submitted a check on both.  Thanks Alan!  

Submitted by Brad Hankins on Tue, 2017-10-03 18:25

Hey Alan, my CPA is now ready to submit my 2016 tax returns.  He filed for the extension back in April.  He has the explanatory statement completed and sent it to me for my review.  It looks fine to me but I must admit I’m still uncomfortable with this whole process.  It’s titled “Statement Explaining Recharacterization of ROTH IRA’s to Traditional IRA’s as required by regulation 408A-5 2016”.  It lists all the account numbers, dates, etc, for ROTH IRA’s on myself as well as my wife.  Is there anything specific that I should confirm or be sure is included?

Submitted by Alan - IRA critic on Tue, 2017-10-03 22:58

That explanatory statement will probably suffice, but the IRS asks that the amount of the original conversion be included and the amount recharacterized (same as original for a total recharacterization) as well as the amount that actually transferred back to the TIRA account (will show on the 1099R) and the dates for each transaction. That will help the IRS match up to the 1099R that will be issued in January.

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