IRA DISTRIBUTION DIRECT VS TRUSTEE TO TRUSTEE
i RECENTLY RAN INTO A PROBLEM WHERE THE CLIENT TOOK A DISTRIBUTION FROM AN ira ACCOUNT. tHE CHECK WAS MADE OUT TO THE INDIVIDUAL. tHE CHECK WAS THEN DEPOSITED INTO ANOTHER ira ACCOUNT. uNFORTUNATELY, THE CLIENT HAD VIOLATED THE 365 DAY RULE. i SPOKE TO THE irs ABOUT THIS ISSUE AND WAS TOLD THAT A WAY TO GET AROUND THIS 365 DAY RULE WHEN YOU WISH TO TAKE A DISTRIBUTION RATHER THAN DOING A TRUSTEE TO TRUSTTE TRANSFER, IS TO HAVE THE CHECK MADE OUT TO THE ira ROLLOVER INSTITUTION fbo PERSON’S NAME. tHIS WILL NOT BE TREATED AS AN EXCESS DISTRIBUTION BECAUSE YOU COULD NOT HAVE CASHED THE CHECK THEREFORE IT WILL BE A QUALIFIED ROLLOVER EVEN WITHIN THE 365 DAY RULE. tHE CHECK WOULD BE MADE OUT TO IE. VANGUARD FBO JOHN DOE
ANY COMMENTS?
Permalink Submitted by Alan Spross on Wed, 2011-06-22 23:54
Yes, the number of direct transfers possible is unlimited. But many people that do 60 day rollovers need the money for some short term purpose, and therefore request a distribution check made out to them. What the IRS told you is correct, but that does not solve the current problem for the client.
Are you sure he is in violation? The 12 month restriction applies per IRA account and is measured from the date of distribution, not from the date the rollover is completed.
There is a work around for this if the client realizes the problem before the second distribution is rolled over, but not afterwards. If the rollover amounts are very different in size, there is also a way to elect to roll the larger one and pay the taxes on the smaller one.
Permalink Submitted by Jose Morales on Thu, 2011-06-23 16:06
It looks like you have just enough information to be dangerous…
There are two methods of movings funds from one IRA to another and they are either a distribution/rollover or an IRA to IRA Transfer (frequently referred to incorrectly as a direct rollover). As Alan stated, a transfer is not going to solve anything at this point if the client has truly violated the 365 day rule. The IRA custodian that issued the check cannot simply take it back and change who the check is made payable to once they have processed a valid IRA distribution.
Having the check made payable to the new IRA custodian “FBO” the client will not make the transaction a qualified rollover. Rather, this is how a check would be made payable if a properly executed IRA to IRA Transfer was requested. IRA to IRA Transfers are not subject to the 365 day rule or the 60 day rule. Many financial institutions will not make a check payable in this fashion at the request of the client if it is not accompanied by a transfer request that comes directly from the new IRA Custodian.