IRA One Year Rule: Roth Repair?
Assume a traditional IRA has just been rolled over to a new bank, within a year, to maintain FDIC liquidity (discussed in the 8/08 IRA Newsletter), in violation of the one-year rule.
1. According to my notes (from a recent two-day class), is a conversion by direct transfer to a Roth IRA within 60 days of the second rollover an allowed repair of that situation? Must that transaction, and the reconversion to a traditional IRA both be completed within the 60 days, or only the Roth conversion?
2. OR, is the conversion to a Roth IRA, and the reconversion to a traditional IRA only the correct procedure to follow, and not a repair of a violation of the one year rule?
3. OR, are both true?
Permalink Submitted by Alan Spross on Wed, 2008-10-01 21:12
The situation should be broken down into two basic circumstances:
1) IF the institution holding the IRA fails and depositor receives a distribution from the FDIC as receiver which was not initiated by the depositor. but made because the FDIC could not find a buyer, the rollover of that distribution does NOT count against the one rollover rule.
2) If the depositor is trying to avoid the failure in the first place, perhaps because funds on deposit exceed the FDIC insurance limits, there is no automatic exemption. A “work around” solution to this is to convert the TIRA to a Roth IRA in another institution. A conversion also does not count against the rollover limit. Further, if the depositor does not want a Roth IRA or does not qualify for conversion, a subsequent recharacterization of the conversion also DOES NOT COUNT, and the funds are then restored to a TIRA with a solid custodian. The recharacterization does not have to be done within 60 days of the conversion.
What does NOT work, and I cannot tell exactly from your post, is where a second rollover is made prior to the conversion. In that case, the conversion does not count, but it does not erase the second rollover. The second rollover must be the conversion itself. If the conversion is actually the third rollover within 12 months, the repair fails and there is a failed conversion.
Much of this problem can be avoided by simply doing a direct transfer to another institution. That seems much less work intensive than going through a conversion and recharacterization process by handling the funds personally.
With the proposed increase of FDIC and presumably NCUA limits, much of this activity can be avoided. However, the increase should be permanent, not temporary as proposed. In addition, if taxable accounts are increased to 250,000, retirement accounts should be boosted to 500,000.
That said, I am not totally sure that I answered your question. If not, please re post.