Indirect Rollover done in multiple steps…

Submitted by Nathan Kastner on Tue, 2020-08-25 22:43

Client takes $800k out of his IRA in order to purchase a lake home. His plan is to sell his existing vacation home ($400k), and two other rental homes (each $200k) that he owns, within 60 days of the distribution, so that he can return the full $800k to the same IRA and call it an indirect rollover. Client has not performed another indirect rollover in the past 365 days.

Let’s suppose that the client sells one rental on day 10. He now has $200k in his pocket. He sells the other rental on day 20 (another $200k), and he plans to close on the vacation home on day 52 (the final $400k). Can he roll each check into the IRA as they become available, or does he have to wait until he has all three checks and send them in at once? His fear is that sending in three checks at separate times might be considered three different rollovers. In other words, does the IRS actually count the number of distributions and rollover contributions, or do they simply look at everything happening during that 60-day period as one rollover “incident”?

Thanks,



Submitted by Alan - IRA critic on Tue, 2020-08-25 23:38

The one rollover rule is measured by the distribution, not the rollover contribution. SInce there is only a single distribution here, the 60 day rollovers can be done in many increments and client will only be deemed to have rolled over 1 distribution regardless of the number of rollover deposits.  That said, completing a 60 day rollover based on a real estate closing is very risky, as several things can occur thaty delay the closing or jettison the sale altogether.  Having 3 closings makes this riskier in term of completing the entire rollover, but less risky for completing a partial rollover, since only 1 closing must occur in time to have a portion of the 800k rolled back. For portions not rolled back, tax and the 10% penalty will also apply if under 59.5.

Submitted by Nathan Kastner on Wed, 2020-08-26 14:29

Thanks, Alan. I’m with ya – I was completely against using the IRA as a short-term loan to bridge a bunch of real estate closings. If even one thing goes wrong, it coudl be disasterous. Expecting three real estate closings to go off without a hitch is unlikely. But the client was THOROUGHLY warned of the potential consequences. For what it’s worth, two of the three closings are complete, and the client has enough cash in money market that he’s probably okay even if the third closing doesn’t happen in time. He still has about 20 days. Fingers crossed. Thanks again, 

Submitted by Nathan Kastner on Wed, 2020-08-26 14:36

Follow-up question: you mentioned that the rollover count was based on distributions, not contributions. So, if I take a $500k taxable distribution from IRA1, and on the same day take another $500k taxable distribution from IRA2, and then a week later I make a $1M indirect rollover contribution to IRA3, have I violated the “once per year rule” (and, as a result, the excess contribution rules)? Based on your comments above, I would suspect the answer is “yes”. Thanks! 

Submitted by Alan - IRA critic on Wed, 2020-08-26 15:00

  • Yes, since there were two distributions from different IRA accounts, only one of them can be rolled over. 500,000 would be be subject to tax and penalty and would have to be removed from IRA 3 as an excess regular IRA contribution.  If the two distributions had been done from the same IRA on the same day, perhaps they could be treated as a single distribution, but the IRS has not clarified that point. The one rollover rule is mostly enforced by IRA custodians when the situation is obvious.
  • Before recharacterization of conversions were disallowed, an escape hatch for taking a second distribution was to convert the second one (conversions not subject to one rollover limit), and then recharacterize the conversion back to TIRA.  While that can no longer be done, anyone taking a second distribution within a year that cannot be rolled over may still consider converting it. They are going to owe taxes anyway, and the conversion eliminates the penalty and funds are better off in a Roth IRA than in a taxable account.

Submitted by ssel on Wed, 2020-08-26 23:21

What would happen if a single distribution was requested, but the custodian issued two checks on different days?  This is hypothetical at the moment, but I have reason to be concerned about an upcoming distribution (from an HSA, actually).  Thanks.

Submitted by Alan - IRA critic on Thu, 2020-08-27 00:02

Of course, that would only matter if you wanted to roll both of them back. In that case, you could only roll one of them back unless you wanted to take an aggressive stance based on your “single request” for a distribution. If this ever came to the attention of the IRS, you could take your chances if you can get a letter from the custodian confirming you made a single distribution request for the same day. Am not aware of any IRS guidance relative to this situation.

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