60 day rule
Can an IRA owner take money out of their account pre 59.5 and use it as a sort of bridge loan on a real estate transaction and place it back in within 60 days and have no tax or penalty consequences? Any help would be appreciated from the forum… Thank you….
Permalink Submitted by Alan Spross on Tue, 2012-10-16 16:29
Yes. it’s not what the Congress intended, but you can do. But only once within a 12 month rolling period per IRA account.
If you needed to do it twice within the 12 months, you would directly transfer part of your IRA (partition it) to another IRA account. You would then have two accounts and could do a distribution and roll back from each one within the 12 months.
Permalink Submitted by Shawn Danziger on Tue, 2012-10-16 17:50
Thank you for your response
Permalink Submitted by Mike Smith on Mon, 2012-10-29 06:06
If a client has taken funds (say 10K, and the account is 200K), decided before the 60 day rule to return, and the trustee credits account, Now, end of year, accounting at trustee issues replacement check, sends check and then….the client cashes the check (the 10K), we are within 45 days of the second check issuance and cashing, 10K into personal account….client repeatedly attempted to contact original trustee and remedy with zero results.
now, the client transacts a Trustee to Trustee direct rollover, and the original trustee sends (200k)
also, the client wants to report the deposited 10K as a liability. Is the client at risk or IRS judgement on the 10K as a distribution? Is it correct for client to record a liability and hold funds, thus protecting the trustee to trustee transfer.
Assumptions
original trustee has poor reporting and communication skills
client is confused and wants to protect the transfered assets
client does not want to take a distribution and is pre-RMD and post 59.5 and IRA has been open for over 5 years
Permalink Submitted by Alan Spross on Mon, 2012-10-29 18:10
I don’t fully follow what happened here.
Client did a 60 day rollover, followed by a replacement check. Why was a replacement check issued?
If the replacement check was issued in error by the custodian, they need to take the funds back and then do another T to T transfer of that 10k to the account the first transfer went to. The direct transfers are not reportable, but the custodian needs to agree to only issue a 1099R for the first 10k that was rolled back. A 20k 1099R would also work and the client would then report a 20k rollover on line 15 of Form 1040, but technically it would be better if the custodian rescinded the second 10k distribution and treated it as if it never happened.
The IRS has the authority to extend the 60 day rollover period, but does not have authority to waive the 12 month one rollover rule. That’s why you never see a PLR addressing the 12 month rule. Enforcement of the 12 month rule is basically at the custodian level, so it’s best for the custodian to correct their error, and report only one distribution for 10k.
Permalink Submitted by Mike Smith on Mon, 2012-10-29 19:06
so the client wanted a distribution from their IRA…..
Got the Check and decided not to cash…..and then sent it back……
Trustee did not, as customary, reduce the account as the check was not cashed….. Check was recieved into mail and not cancelled……
Record keeping at the Trustee had an outstanding check and did not see the check client sent back to Trustee……Record keeping automatically sent a replacement informing client to cash, and that a fee would be charged if client does not cashed, and another check would be sent, until client endorses and deposits check……
Client gets fed up with Trustee, and goes to a new trustee, initiating a trustee to trustee transfer (direct rollover).
Client endorses and deposits check, and at the same time, original trustee honors the direct rollover, delivering 100% of client funds directly to new Trustee, and client is holding the original distribution requested….
hope this helps. What should the client do with the funds in possession?
Permalink Submitted by Alan Spross on Tue, 2012-10-30 02:39
If client needs the 10k, he will have a taxable distribution.
He should check with the original trustee to determine the amount they will report as a distribution on the 1099R. If it is only 10k and his new IRA account is only 10k short, then if he does not need the 10k, he can complete the rollover by deposting the second 10k check into the new IRA as a rollover. He must not have done a previous rollover within the last 12 months. Determining the amount the original custodian will report on the 1099R will clarify if the custodian is considering the first distribution as a rollback to the account or just a voided distribution.
If they are going to report 20k as a distribution, then client will have to consider the first one as a rollover and is stuck with the second one. He would report 20k on his 1040 with a 10k rollover and 10k taxable. If he needs the 10k for expenses, no harm done if the 1099R shows 20k except that he cannot do another indirect rollover from the new IRA until 12 months passes from the date of the first check distribution.