Separating IRA monies to allow more 60 day R/O Rule Options

Submitted by Julie Brangenberg on Tue, 2011-02-15 15:37

I have a customer who would like to expand his 60 day Rollover Rule options. He has multiple IRA’s with multiple trustees. Can he create another IRA with the same Trustee that he has IRA money with and transfer some of the IRA money into it internally, and allow him to have two 60 day rollover rule opportunities?



Submitted by Alan Spross on Tue, 2011-02-15 15:54

Yes. The partitioning of the IRA accounts into multiple IRA accounts should be done by direct transfer and would result in increased sources for doing indirect 60 day rollovers. That would avoid exposure to the one rollover per 12 month period rule per IRA account. Of course, such activity is not conducive to generating gains in these accounts.

Submitted by Julie Brangenberg on Tue, 2011-02-15 16:13

Will this work if the IRA money stays with the same Trustee, but in a different IRA account?

Submitted by Alan Spross on Tue, 2011-02-15 16:35

Yes, it will work either way because the rollover rules apply to accounts, not to custodians. Moreover, the same custodian is more likely to consider any internal transfer as direct and not want the added expense of a 1099R report. If someone is going to do this, they certainly do not want a 1099R to be issued and then have to prove to the IRS that the transfer was actually done directly and should not have been reported. It is a good idea to verify with the custodian BOTH factors, ie a direct trustee transfer and also that is will NOT be reported.

Submitted by Julie Brangenberg on Tue, 2011-02-15 17:00

I just want to make sure that doing a direct transfer to a new IRA with the same custodian and using the 60 rollover rule for both IRA’s won’t trigger red flags with the IRS.

Submitted by Alan Spross on Tue, 2011-02-15 17:24

There is no problem either as a same trustee transfer or a different trustee transfer. As long as there is no 1099R, the IRS sees nothing.

But if an IRA with a year end balance of 10,000 produces 90,000 of 1099R reported distributions and 90,000 of rollover contributions on a 5498, then you have a big red flag that suggests multiple rollovers from the same account.

Submitted by Julie Brangenberg on Wed, 2011-02-23 22:25

Could client take a distribution from his IRA, and roll it back in within 60 days, then within the same 12 mos. transfer funds from the same IRA to a new IRA account and take a distribution from the new IRA account and put the money back within 60 days?

Submitted by Alan Spross on Wed, 2011-02-23 23:19

Probably could. The IRS has not really defined how they interpret the tax code with respect defining what is meant by “amounts” and “an individual retirement plan account”. From a practical standpoint the IRS depends on custodians to detect these infractions just as they depend on custodians to enforce the 60 day rollover time limit. And a custodian would not bother to question a taxpayer even though the custodian is the one bearing the expenses of repeated rollovers. Not unless this was carried to extremes.

Could a taxpayer do so many of these transfers and rollovers to irritate custodians to the point where they contacted the IRS? Highly unlikely. They would just refuse further business from the taxpayer. And even if they did report this to the IRS, the IRS would probably not be interested unless the dollar amounts were huge.

In summary, a client would be violating the intent of the rule, but nothing would come of it unless carried to extremes.

Submitted by Lynnette Vining on Thu, 2013-01-24 19:58

 To clarify  what we are thinking – and to ensure we are all on the same page.  Originally IRA #1had $330k in it. Right now we have borrowed $225k from IRA #1 for 60 days.  I have already set up another IRA (#3) which a direct transfer for $105k was made in it from IRA#1 (after the $225k was borrowed).  We will not pay back $225k to IRA#1 but  $150k.  So we pay back $150k (using  business money) on Feb 6th to IRA #1 (it’s definitely ok for money to go back into same IRA #1?).  I then transfer that $150k to a new IRA #2 and we withdraw it a couple of weeks later, on Feb 20th to pay back from business money $150k (are we absolutely sure that it’s ok to withdraw this money again – we aren’t breaking the 1 year rule because it’s been transferred into a new IRA#2?).  Then we have 60 days, till April 20th to come up with $150k to pay back that IRA #3.  On April 20th, we withdraw $105k from IRA #3 to pay back  IRA #2.  That leaves us needing to come up with $45k by April 20th or have to pay tax on that amount next year (due Apr 2014).  And it buys us 60 days (till June 20th) to come up with the $105k to pay back IRA #3 or have to pay tax on that.  So the cashflows on our side would be  Feb 6th – $150k from  personal business acctFeb 20th – $150k back to personal business acctApril 20th – we need to come up with $45k cash (or face tax bill in Apr 2014)June 20th – we need to come up with $105k cash (or face tax bill in Apr 2014) Does this approach sound legal and within rules for 60 day and roll over using new IRAs and direct transfers?  I appreciate your advice!

Submitted by Alan - IRA critic on Thu, 2013-01-24 23:27

You seem to have a handle on the general principles here, but you lost me about half way through with the details. Perhaps you misstated one of the IRA #s or amounts. Transfers do not count and do not generate a tax reporting form. I total 480k of distributions that will be reported on a 1099R and that amount must be offset by 480k of contributions reported on Form 5498. Please provide the amounts you will withdraw from each of the 3 IRA accounts and the amount you will roll into each of those 3 accounts. I am getting a higher amount of rollover contributions than distributions and that cannot be correct. Remember to disregard the direct transfers. Finally, note that you are devising a way to technically comply with the rollover limits and the IRS has so far allowed these types of schemes. But keep in mind that the IRS discourages actual borrowing strategies from IRA accounts and that is what you are planning to do. So if you mess up anywhere along the way, the IRS will not be willing to make any particular exceptions. To get technical, the IRS can allow extension of the 60 day rollover period for justifiable reasons, but cannot make exceptions to the one rollover limit per IRA account in a 12 month period.

Submitted by Lynnette Vining on Fri, 2013-01-25 02:17

Sorry, my explanation needs work, I’ll try again.

  1. I have a IRA that had $330k in it originally. I will call this IRA #1
  2. I took out $225K under the 60 day rollover option but will only replace it with $150k, owing taxes on $75k . This will go back into IRA#1.
  3. I opened a new IRA, I call IRA#3 , and transferred $105k ($330k-225k=$105k) into it. This was done after the $225k distribution and a direct transfer.
  4. At this time, the 60 days is not yet up, but approaching and the plan is to put the $150k (not $225) into IRA#1.
  5. Then open a new IRA, called IRA #2 and direct transfer the newly returned $150k from IRA#1 into IRA#2.
  6. Withdraw  $150k from IRA#2 for another 60 days a week or so after the direct transfer from IRA#1.
  7. After the second 60 days, money taken from IRA #2 will be paid back from IRA#3 in the amount $105 leaving $45k in taxable income due April 2014.
  8. After another 60 days, I will have the $105k to return to IRA#3.
  • Summarizing, I will pay taxes on $75k this year and $45K next year, but use the original $330k for 120 days with a few weeks between each distribution. I am creating a total of two new IRA’s and making two direct transfers and three distributions.
  • Again, I appreciate your help.

Submitted by Alan - IRA critic on Fri, 2013-01-25 03:58

I don’t see any technical violations here. While unlikely, you will have to hope your IRA custodian(s) don’t give you any problems. For reporting, you will end up with 480k on line 15b of Form 1040 and 120k on 15b with “rollover” entered next to 15b. The 120k will also be subject to the 10% penalty unless you have a penalty exception.

Submitted by Lynnette Vining on Fri, 2013-01-25 17:13

I am over 60 years old, so no 10% penalty?

Submitted by Alan - IRA critic on Fri, 2013-01-25 17:23

No penalty. Age 59.5 is the most common penalty exception.

Submitted by Lynnette Vining on Sat, 2013-01-26 05:10

  • Since the first rollover distribution($225k) was taken out in December 2012, even though 60 days is up in February, my tax return for 2012 will be $225k with $75k taxable rollover?
  • Next year for 2013 taxes, would reflex $150k+105k=$255k with $45k taxable?

Thanks so much for your help and advice. Are you a CPA, Tax advisor, Lawyer?

Submitted by Alan - IRA critic on Sat, 2013-01-26 17:29

  • Correct, as long as the 150k is rolled over within 60 days.
  • Also correct. Reporting is based on the year of distribution, not the year the rollover is completed.
  • Not any of the above, but have tax preparation experience and have been studying retirement plan issues for many years. Probably have addressed over 10,000 inquiries on this and other forums.

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