Looking to fix a busted rollover b/c of one-year rule

Submitted by Sarah Abbott on Sat, 2013-09-14 19:03

I might have violated the one year rule and am looking for ideas on how to fix it. Here are my facts:

Day 0 – Three Roth IRAs

IRA-1 $50k balance
IRA-2 $60k balance
IRA-3 $0 balance

I need a short term loan and decided to use IRA-3 to avoid tainting the large balances.

Day 1 – direct transfer of $20k from IRA-1 to IRA-3 and withdrew it
Day 3 – realized I needed a larger short term loan, so I did another direct transfer $5k from IRA-2 to IRA-3 and withdrew it
Day 10 – deposited $20k back into IRA-3 and classified it as a 60 day rollover
Day 22 — realized I violated the one year rule on Day 3 and now worried about how to fix it.

Since these are Roth funds, I can’t deposit the $5k into a Roth 401k. I’m thinking my only two options are (i) deposit the $5k into a new Roth and roll the dice or (ii) keep the money because this would be a withdrawal of my Roth contribution and therefore not subject to penalties. Any alternatives I’m missing?

Sarah



Submitted by Linda Randazzo on Sat, 2013-09-14 20:01

I don’t see this as a problem. Someone will correct me i am sure if i am off on this. Rollover rules are two fold: May not roll from the same IRA within 12 months and may not roll funds previously rolled within last 12 months.20k was from one IRA and 5k was from another (same IRA was not hit twice)I don’t see why you can’t roll the 5k into IRA 3.



Submitted by Sarah Abbott on Sat, 2013-09-14 20:53

The transfers from IRA1 to IRA3 and IRA2 to IRA3 were not rollovers — they were trustee to trustee transfers.  Its the two withdraws from IRA3 3 days apart that concern me since they are from the same IRA.



Submitted by Alan - IRA critic on Sat, 2013-09-14 21:29

  • You DO have a problem. Will assume your Day 1 and Day 3 transactions TO IRA 3 were by direct transfer, and the only withdrawals were FROM IRA 3. Since you have withdrawals from IRA 3 on two different days, you can only roll one of them over as you did on Day 10. The remaining 5k is not eligible for rollover, so you should just keep it and report it as a distribution on Form 8606. You probably have a balance of regular Roth contributions greater than 5k, and if so the distribution will not be taxable. You will just have 5k less in your Roth IRAs than before.
  • The situation is considerably worse if the movement of funds TO IRA 3 on Days 1 and 3 was not done by direct transfer.


Submitted by Sarah Abbott on Sat, 2013-09-14 23:02

Thanks.  Yes, the movement of funds to IRA 3 were by direct transfer.  My first withdrawal from IRA 3 isn’t problematic, right?  Also, how is all of this reporting to the IRS?  On a 1099-R?



Submitted by Alan - IRA critic on Sat, 2013-09-14 23:42

First withdrawal is OK as a normal permitted rollover. Fortuneately, that was the larger amount. You will get a 1099R for IRA 3, nothing for the direct transfers.  You will report 25k on line 15a of Form 1040, 0 on 15b with “rollover” entered on the line next to 15b. Form 8606 will report the 5k you cannot roll over, but if you have more than that from regular contributions in your Roth IRA, there will be no taxable amount and that is why 15b will be -0-. Next May you and the IRS will get Form 5498 showing that 20k was received as a rollover contribution TO IRA 3 and the IRS will know that 20k was rolled back and that is why only 5k is reported on Form 8606 as a distribution. Of course, if you have any transactions, they will have to be added in.



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