60 Day Rollover
My client initiated a rollover on two 401k’s from the same employer and administrator. One was for his 401k as an employee, the other for his 401k as a manager. My client subsequently left the country and is unreachable for the next 3 months. His wife received the checks, deposited them in his non-IRA checking account. The bank accepted the checks and they are cleared. My client’s wife can write a check from the checking account for deposit to his IRA. Can both 401k’s be re-deposited and coded as a 60 day rollover?
Permalink Submitted by Alan Spross on Mon, 2011-02-14 23:27
Only with a letter ruling from the IRS authorizing an extension of the 60 day rollover period. The IRS has been lenient in most cases doing this, probably because the cost is so great for missing the deadline. Not to add to the problem, but if the checks were made out to him, then there was probably 20% withholding applied, and the withholding amount would have to be replaced to complete the rollover. Otherwise, there are taxes and penalty on the withheld part that went to the IRS instead of to the employee.
But she should still proceed with the rollover ASAP. The IRS is more likely to approve an extension of the time limit if the taxpayer acts as soon as they realize the error. There will be a fee for an IRS letter ruling request, but it is lower than most other such fees. A qualified professional should prepare the request, and can assist in explaining the delay. If he was in the military or went overseas for surgery or health reasons, the chances are excellent. If he just went overseas on business or pleasure, the chances are not as good. Whether this is worth the hassle or not depends on several things, mostly the amount of the checks, but also the tax bracket and if the penalty would also apply.
Permalink Submitted by [email protected] on Mon, 2011-02-14 23:43
Thank you for your response. The question was not whether or not the client was allowed an extension, rather whether or not both 401k’s could be coded as a 60 day rollover.
There were no withholdings, the depositor bank missed the fact that the checks were made out to the IRA custodian.
Permalink Submitted by Jose Morales on Mon, 2011-02-14 23:49
[quote=”[email protected]“]Thank you for your response. The question was not whether or not the client was allowed an extension, rather whether or not both 401k’s could be coded as a 60 day rollover.
There were no withholdings, the depositor bank missed the fact that the checks were made out to the IRA custodian.[/quote]
The 1099R from the withdrawl of the 401K funds will have a code “G” for a direct rollover. The deposit of the funds back into an IRA will be coded the same whether the funds were directly or indirectly rolled over. There will be nothing on the 5498 that will identify the funds as having been rolled over from a qualified employer plan, an IRA, within 60 days, after 60 days… That is all really on the honor system. I’m not advocating misleading the IRS, I’m just saying that the system they set up for reporting these transactions is what it is.
Permalink Submitted by Alan Spross on Tue, 2011-02-15 00:01
urusei2,
From various feedback over time, I am getting the impression that checks made out to the IRA custodian FBO taxpayer’s IRA are being cashed in many cases by banks. That defeats the intent of direct rollover withholding exemption. What’s your take on this practice?
Permalink Submitted by Jose Morales on Tue, 2011-02-15 00:17
[quote=”[email protected]“]urusei2,
From various feedback over time, I am getting the impression that checks made out to the IRA custodian FBO taxpayer’s IRA are being cashed in many cases by banks. That defeats the intent of direct rollover withholding exemption. What’s your take on this practice?[/quote]
This doesn’t just happen with direct rollovers from employer sponsored plans, it also happens more frequently than it should when a client is given an IRA to IRA Transfer check to deliver themselves. Plan administrators almost always ask for the information of the receiving IRA Custodian for a direct rollover, and I feel they should make it a practice to deliver the funds to the IRA custodian directly in order to avoid the situation that is described in the original post. Believing that the check will not end up in a personal account because it is made payable to an IRA custodian “FBO Joe Smith” is very wishful thinking. The same applies when dealing with IRA to IRA Transfers. They should always be delivered directly to the receiving IRA custodian, not given to the client to deliver themselves. Front line tellers who cash or deposit these checks have very little to no training with regards to retirement accounts and truly do not know any better, even though they should.
Permalink Submitted by [email protected] on Tue, 2011-02-15 00:28
[quote=”[email protected]“][quote=”[email protected]“]urusei2,
From various feedback over time, I am getting the impression that checks made out to the IRA custodian FBO taxpayer’s IRA are being cashed in many cases by banks. That defeats the intent of direct rollover withholding exemption. What’s your take on this practice?[/quote]
This doesn’t just happen with direct rollovers from employer sponsored plans, it also happens more frequently than it should when a client is given an IRA to IRA Transfer check to deliver themselves. Plan administrators almost always ask for the information of the receiving IRA Custodian for a direct rollover, and I feel they should make it a practice to deliver the funds to the IRA custodian directly in order to avoid the situation that is described in the original post. Believing that the check will not end up in a personal account because it is made payable to an IRA custodian “FBO Joe Smith” is very wishful thinking. The same applies when dealing with IRA to IRA Transfers. They should always be delivered directly to the receiving IRA custodian, not given to the client to deliver themselves. Front line tellers who cash or deposit these checks have very little to no training with regards to retirement accounts and truly do not know any better, even though they should.[/quote]
Agreed… unfortunately in this case the administrator requires that the checks be sent directly to the participant.