ONCE A YEAR ROLLOVER
The office has a new client that rolled a large sum of an IRA from broker A to broker B in an indirect transfer. He then proceeded to roll the same amount from broker B to broker C indirectly. He took the check each time made out to himself personally, never used the funds, and did meet the 30 day rollover requirement rule. Is there any kind of ruling or any case that you could point us to that could help prevent this taxpayer from paying taxes on the money. Any advice would be appreciated.
Permalink Submitted by Peter Lingane on Sat, 2011-04-02 20:26
A second rollover from the same IRA within twelve months would not be tax free – meaning interest, possibly a premature distribution penalty and a 6% per year excess contribution penalty until withdrawn.
Pub 590, p. 25, says that two rollover cannot be made from the “same IRA” within 1-year. Are the two IRAs different since they involved different custodians? Unfortunately not. Marshall H. Martin, TC Memo 1994-213 addresses a similar fact pattern, IRA-1 to IRA-2 to IRA-3, all with different custodians, within twelve months. At issue was whether the first transfer was a rollover or a trustee-to-trustee transfer (which is not subject to the once a year rule). The decision was that the first transfer was a rollover and that therefore the second rollover was taxable and an excess contribution.
Permalink Submitted by Alan Spross on Sat, 2011-04-02 21:19
I am not aware of any letter rulings with respect to the one rollover rule, either in favor of the taxpayer or against. Meanwhile there are hundreds of them every year addressing the 60 day time limit, mostly in favor of taxpayers unless taxpayers used the money for expenses.
I suspect most of these infractions slide through because the IRS does not know the dates of rollovers, only the year. That leaves enforcement to IRA custodians or to an IRS audit. The IRA custodian staff for the most part are not aware of the rule or interested in investigating the various ways this can happen, including sandwiching a direct transfer or two in the middle of a rollover sequence. Lack of enforcement equates to the lack of letter ruling requests. Another factor is that this rule exists to help control the custodian’s processing costs for IRA accounts and not to assist the IRS in collecting taxes.
So I am not aware of any exception available to this taxpayer or how the IRS might rule if they received a request. One positive is that rollover requests cost less than most requests. There are 3 different costs based on the amount of the rollover requested, and I recall the the max cost is 3,000 (plus prep fees).
Permalink Submitted by Jennifer Poole on Sun, 2011-04-03 23:47
[quote=”[email protected]“]A second rollover from the same IRA within twelve months would not be tax free – meaning interest, possibly a premature distribution penalty and a 6% per year excess contribution penalty until withdrawn.
Pub 590, p. 25, says that two rollover cannot be made from the “same IRA” within 1-year. Are the two IRAs different since they involved different custodians? Unfortunately not. Marshall H. Martin, TC Memo 1994-213 addresses a similar fact pattern, IRA-1 to IRA-2 to IRA-3, all with different custodians, within twelve months. At issue was whether the first transfer was a rollover or a trustee-to-trustee transfer (which is not subject to the once a year rule). The decision was that the first transfer was a rollover and that therefore the second rollover was taxable and an excess contributi
Permalink Submitted by Lee Martinson on Mon, 2011-04-04 16:23
It seems to me that 2010 Pub 590 makes it clear anyway. [Extracted from page 24, top of 2nd column] It says that the one year period also counts for the IRA the money is rolled “into.”
Here is the wording:
“Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA [i][b]into[/b][/i] which you made the tax-free rollover.
The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.
Example.
You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.
However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax-free, any distribution from IRA-2 or made a tax-free rollover into IRA-2. ”
Lee