60 day rule — IRA to IRA rollover

Submitted by chris erickson on Tue, 2014-01-28 04:28

Hi,
I’m trying to help a client with a situation. The client intended to transfer their $150K XYZ brokerage firm’s IRA to their Fidelity IRA. For whatever reason (we believe due to a processing error on XYZ’s part), XYZ processed the $150K transaction as a $150K taxable distribution and also withheld $15K (10%) for federal tax, so the client received a check for $135K. Assume that XYZ is not willing to cancel the $135K check, reclaim the $15K w/h tax, and re-process this as a trustee-to-trustee transfer (this is currently an open issue, but we are planning for worst-case if XYZ refuses to re-process.)

1. If the client has an extra $15K in their checking account, could they issue a personal check for $15K plus the $135K XYZ check and deposit both checks into their Fidelity IRA (within 60 days of the $150K distribution) … or would the two physical checks count as two rollover deposits into the IRA, making the one of the two deposits invalid as a rollover deposit?
2. If the client first deposits the $135K check into their checking account and then writes a single check for $150K for deposit in the Fidelity IRA, is this better and would this count as one rollover instead of two?
3. Does the fact that the client also took a $20K taxable distribution from their Fidelity IRA 40 days ago change anything … i.e. we would be making a rollover deposit into the same Fidelity IRA that recently had money distributed from it (i.e. taxable distribution from Fidelity IRA, taxable distribution from XYZ IRA, and rollover deposit into the same Fidelity IRA all within 60 days start-to-finish.)

Thank you for your answers and any other strategies (financial institution error?) you might be able to come up with.



Submitted by Alan - IRA critic on Tue, 2014-01-28 15:58

  1. Replacement of the withheld amount to complete the rollover is permitted. The distribution of the check and withholding is considered to be just a single distribution, so as long as the client has not already used up the one rollover per 12 month period with an unrelated rollover, the complete rollover of 150k can be completed.
  2. Either way. A separate check is also OK because the distribution determines the number of rollovers so the re deposit could be done with several different checks. Nonetheless to avoid any custodian misunderstanding, doing as you proposed is the better option.
  3. Not a problem as long as the 20k distribution was not rolled over.
  4. The only way XYZ will rescind the transaction is if they were 100% negligent in processing the client’s request. It’s not worth the effort unless client is confident that a direct transfer was clearly offered. If redone, it even may cause a similar issue with the Fidelity IRA depending on what Fidelity reports. The only benefit would be to preserve the one rollover for the future, but if the rollover is completed per 1) above, client must be sure not to do another rollover from the Fidelity IRA for 12 months.

Submitted by chris erickson on Tue, 2014-01-28 18:13

Thanks and a question about #4.  The client is confident a direct transfer is what was instructed, not a taxable distribution.  However, I don’t understand the potential issue with the Fidelity IRA if the XYZ distribution is reversed, because the previous XYZ transactions would be voided and a new direct trustee-trustee transfer to Fidelity would occur like it should have in the first place. ?????Thanks again! 

Submitted by Alan - IRA critic on Tue, 2014-01-28 18:33

It depends on how XYZ would re do the transaction and how long they spend resisting and researching the procedures. There are several different approaches they could take, but the withholding complicates things. With respect to Fidelity, there is also the question of how they show whatever solution is used on their IRS reporting, since Fidelity has to be in sync with the 1099R issued by XYZ. There are alot of balls in the air, so it would be nice if everyone understands how XYZ proposes to proceed before they mess things up even worse than they did before.

Submitted by chris erickson on Wed, 2014-01-29 19:50

Thanks and one more question if you don’t’mind.  We won’t know until next week what if anything XYZ is willing to do, but if they don’t back out the entire transaction, but simply reclaim the withholding tax and then issue another taxable distribution for the withholding tax (i.e. as if it had been a 100% taxable distribution, but coming as two checks, the current one for the 90% and a new one for the 10%), and if the client deposits the two checks in their bank account and then writes a single one to the Fidelity IRA for the entire amount, would this count as two rollovers in the 12 month period?  (Because TWO distribution checks were issued, even though a single personal check for the entire amount would be deposited at Fidelity, would this count as one rollover or two?)I’m just trying to have a response ahead of time if they only want to just re-issue the withholding check as a taxable distribution and whether this would violate the once in 12 months rule.   Thank you again very much for your thoughts.

Submitted by Alan - IRA critic on Wed, 2014-01-29 21:02

  • If they could reclaim the withholding, which I doubt, they could simply do a direct transfer of the 15k to Fidelity, but the one permitted rollover would be used up.
  • If the earlier transaction was rescinded, and two new checks issued. it would be OK as long as both were dated on the same day. That would avoid the “later distribution” mentioned in the one rollover rule. Client could deposit in Fidelity as one check or multiple checks within 60 days and not break the rule as they would be a rollover of the same distribution. However, to avoid any confusion on how Fidelity might interpret the rule, best to consolidate into one check to complete the rollover.
  • Part of the problem is that many institutions do not wish to coordinate with another institution in resolving something like this. But it is best that the 5498 from Fidelity match the 1099R from XYZ OR if redone as a non reportable transfer, there should be no 1099R and no 5498 to avoid IRS mismatch issues. 

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