IRA Rollovers
I have a prospective client who, because of losing his job in 2008, did some unusual things with his IRA’s. He took possession of portions of his IRA’s only to put most of the money back within the 60 day window. Two problems that I suspect, but can’t seem to find any IRS rulings or information in Ed’s books are: 1.) Once he has taken from an IRA, only to put the money back in the same IRA, I thought he can’t touch it for 12 months (some was not back as he needed it for his family) 2.) I suggested submitting a descriptive letter to the IRS confessing the error of his ways to possibly prevent future penalties. His CPA does not know what to do and his frantic. The client firmly believes that he has done no wrong, as he thoroughly researched it before doing this over an 18 month period. They are good people and were simply trying to play the float to keep from having their home and unoccupied rental foreclosed upon.
Can you give me any guidance for these folks and their CPA going forward? He now has a job and they living on peanut butter sandwiches to pay down their debt!
Permalink Submitted by Alan Spross on Mon, 2009-07-20 18:39
You are correct about the 12 month limitation on rollovers from an IRA account. While you did not indicate how many distributions were taken from this IRA or how many IRA accounts were involved, only one distribution can be rolled back within a 12 month period per account. The IRS is particularly unsympathetic about short term loan use of IRA distributions, which makes a successful PLR effort a likely waste of funds.
While some flexibility can be obtained by partitioning an IRA account into multiple accounts by direct transfer, and then taking funds out of each one successively for 60 days before rolling them back, at some point the IRS is going to rule that this was tantamount to fraudulent transfers with a sole intent of using IRA funds for temporary needs. In client’s case, the entire series of distributions and rollovers would have to be examined to determine how many of the rollovers are technically excess contributions which would now have to be corrected since the original distributions were actually taxable. All this will impact his 2008 tax return as well if there are disallowed rollovers reported. SInce only one rollover is allowed, it makes sense to select the largest one for the allowable rollover, not necessarily the first one.
One area of confusion relates to tallying disallowed rollovers. It is actually each particular distribution that must be accounted for. In other words, one distribution can be rolled back at different times and it only counts as one rollover, whereas several distributions combined and rolled back at one time is considered multiple rollovers because there were multiple distributions. A first step is to sit down and see how many dollars are now sitting in disallowed rollovers. It is too bad that client did not get a warning from the IRA custodian about this activity before errors were potentially compounded. Usually a tax preparer is not going to recognize this activity because the IRA custodian combines all the distributions and rollover contributions on one 1099R and 5498 per account. Since the IRS is matching these same documents, much of this activity escapes them as well, meaning that the heads up must come from the IRA custodian or financial advisor.