Indirect Rollover Question
Hello,
I have a client that accidentally made multiple 529 contributions using the checkbook from their IRA account. We are looking at utilizing an indirect rollover as an option to put the funds back into the IRA. Because he made three separate $3,000 529 contributions, there are three separate transactions in his IRA. Will the IRS allow him to lump these together, or are you permitted to only roll back one of them? Each time we’ve done an indirect rollover in the past, there has only been one larger distribution from the account.
Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2023-12-07 16:15
Only one of these distributions can be rolled back to the IRA within 60 days of that distribution. The others could be rolled into client’s qualified plan if that plan accepts IRA rollovers and the 60 days has not expired. This would eliminate tax and penalty on those other distributions. The final alternative is to convert the other contributions to a Roth IRA, which will not avoid tax but will not be subject to penalty. The reason for these alternatives is that the one rollover limit only applies to IRA to like kind IRA rollovers and the alternatives are rollovers to a different type of plan.
Permalink Submitted by Kevin Reardon on Thu, 2023-12-07 16:57
Hi Andy, Thanks for the information! If I’m understanding the final alternative correctly, the client could put the total of $9,000 back into the IRA, but would then have to convert $6,000 to a Roth IRA? The client is age 71, so he’s not subject to the 10% penalty.
Permalink Submitted by Alan - IRA critic on Thu, 2023-12-07 17:09
No, only 3000 can be rolled back to the IRA within 60 days. The other 6000 could be converted to a Roth IRA, also within 60 days. If 9000 was rolled back to an IRA, 6000 is still taxable and an excess TIRA contribution has been made.
Permalink Submitted by Kevin Reardon on Thu, 2023-12-07 17:21
Got it. Would you just deposit the $6,000 into the Roth IRA then and have the accountant code it as a conversion?
Permalink Submitted by Alan - IRA critic on Thu, 2023-12-07 17:28
Yes, it is vital that the custodian codes it as a conversion contribution, not as a regular Roth IRA contribution. Client should then check their Roth statement shortly afterward to be sure that it shows as a conversion contribution. Form 8606 must be filed with the 2023 1040 to report the conversion.
Permalink Submitted by Kevin Reardon on Thu, 2023-12-07 18:03
Perfect, that is the route we’ll go. Thank you so much for your help!