R/O into & R/O out of SAME IRA w/in 12 MONTHS

Submitted by DAVID DAMASKA on Mon, 2014-02-24 00:26

Client(age 71) R/O funds from multiple IRAs into TIRA(A) in JAN&FEB 2013.
Client applied for mortgage loan for a new home w/SAME bank where TIRA(A) held.
SAME bank where TIRA(A) held declined to make the mortgage loan, so client got upset & R/O ALL funds held in TIRA(A) into TIRA(B) held @ a DIFFERENT bank in JUNE 2013.
There were also other R/Os into TIRA(B) from TIRAs held in addition to TIRAs (A & B).

Is my understanding that you CANNOT R/O funds INTO & OUT OF the SAME TIRA within the SAME 12 MONTH period CORRECT?
Is it PROHIBITED w/in the SAME TAX YEAR or simply ANY CONSECUTIVE 12 MONTH period?

fyi:
Some were IN-DIRECT TRANSFERS, while others were DIRECT TRUSTEE-to-TRUSTEE TRANSFERS.
The amount of funds that was R/O into & then R/O out of TIRA(A) is approx. $300K.
Total value of TIRA (B) @ 12/31/2013 approx. $1M.

If this is a serious problem, as I believe it is, then any suggestions for alternatives to mitigate the significant tax & other implications?
1) Any means of undoing this?
2) Any possibility to treat/re-characterize funds out of TIRA(A) & into TIRA(B) as ROTH CONVERSION?
3) Any angles available related to the HOME PURCHASE that they paid $212K CASH out-of-pocket for?

Situation breaks my heart if no viable solutions, as these are such great folks, so all insights would be greatly & sincerely appreciated!

Thanks!



Submitted by Alan - IRA critic on Mon, 2014-02-24 02:40

  • You are correct about the one rollover rule. The 12 month period is measured by the distribution date of the first rollover to the distribution date of the next distribution. Calendar years do not matter. Unlimited non reportable direct transfers can be done. It is the indirect 60 day rollovers that are limited to one per 12 month period.
  • You mentioned some rollovers were done in January, but a taxpayer age 71 is subject to RMDs and the first distribution from any of the IRAs is considered to apply to the RMD and cannot be rolled over. So now you have the added problem excess contributions due to rolling over RMD money unless the RMD was totally satisfied first for all of the IRA balances.
  • Client needs to list all these transactions by amount and date to organize the data. The direct transfers can be omitted. Since only one rollover is allowed, the largest distribution should be elected since the other ones will be taxable, and the others can be treated as taxable and excess contributions to the IRA and removed from the IRA by corrective distributions.
  • A Roth conversion can be an escape hatch if the client is holding the rollover money within 60 days, but once the rollover to a TIRA occurs, it’s too late for this to work. At least there is no penalty on the distributions as client is over 59.5.
  • Also, no home purchase exceptions unless an escrow fell through – if so please advise.
  • If they needed all this cash anyway, it seems like they would have had large taxable distributions anyway?

 

Submitted by DAVID DAMASKA on Tue, 2014-02-25 01:49

Alan:Is the indirect 60 day rollover limit of one per 12 month period applied to EACH separate TIRA individually or ALL TIRAs in the AGGREGATE (limit is per TAXPAYER per YEAR period!)?Does it matter that there are 7 different TIRA accounts involved in these transactions?Based upon info I have at this point, INDIRECT & DIRECT R/Os came out of 6 different TIRAs & went into 1 of 2 TIRA accounts.fyi: client is very conservative & had enough funds in NON-TAX QUALIFIED accounts to access the $212K for the down payment on the home, so did not need any of the TIRA money for this purpose.Thanks!

Submitted by Alan - IRA critic on Tue, 2014-02-25 02:16

Q1 currently has no clear answer because a tax court just ruled that it applies collectively to all IRA accounts of the taxpayer rather than separately. Conversely, Pub 590 and prior IRS guidance has always made it quite clear that the rule applies separately to each IRA account. Therefore, the answer is now in doubt. The direct transfers can be ignored and using the historical IRS guidance if rollovers came from different IRA accounts there would be no infraction as long as the 12 month period also applies to the IRA accounts that received any indirect rollovers.

Submitted by DAVID DAMASKA on Fri, 2014-03-07 01:00

Alan:ALL INdirect R/O DISTRIBUTIONS EACH came OUT of a SEPARATE TIRA (TIRAs #1 thru #5).ONLY (1) INdirect R/O DISTRIBUTION (for 100% A/C value) came OUT of EACH (TIRAs #1 thru #5), which were ALL deposited INTO TIRA(A) on same day distributed. Also, NO INdirect R/Os INTO (TIRAs #1 thru #5) within 12 mos of these INdirect DISTRIBUTIONS into TIRA(A).Subsequently, ALL funds in TIRA(A), which encompasses ALL INdirect R/O DISTRIBUTIONs above (TIRAs #1 thru #5) & some prior existing funds were DIRECTLY R/O-TRANSFERRED (via DIRECT TRUSTEE-to-TRUSTEE Transfer) INTO TIRA(B).1) Please confirm that you are saying, based upon your response (above)/Pub 590 & these additional facts, that you see no infraction, provided NO INdirect R/Os went INTO/Received by (TIRAs #1 thru #5) within 12 mos of these INdirect R/O DISTRIBUTIONS from EACH respective A/C?2) Based upon (above) facts, is there still any potential issue if some of the INdirect R/O DISTRIBUTIONs INTO TIRA(A) took place prior to the ACTUAL intended 2013 RMD W/D coming out of TIRA(B) on 04/23/2013 (fyi: prior to 100% A/C value DIRECT TRUSTEE-to-TRUSTEE Transfer of TIRA(A) into TIRA(B), which would cause the 1st INdirect R/O DISTRIBUTION INTO TIRA(A) during 2013 to be treated as the 2013 RMD vs. ACTUAL intended RMD?3) Client talked to their old TAX Attorney today, & his concern is w/the DIRECT TRUSTEE-to-TRUSTEE Transfer of TIRA(A) into TIRA(B) subsequent to ALL the INdirect R/O DISTRIBUTIONS INTO TIRA(A), & NOT the multiple INdirect R/O DISTRIBUTIONS. Any Thoughts?4) BOTTOM-LINE: @ this point, based upon historical IRS guidance CANNOT do > 1 INdirect R/O INTO &/or OUT of SAME TIRA within smae 12 mos period?Alan, REALLY appreciate you sharing your insights w/KNUCKLEHEADS like me!

Submitted by Alan - IRA critic on Fri, 2014-03-07 03:01

  • 1) Your initial post indicated that funds from TIRA A were RO into TIRA B. RO means indirect rollover. That would not have been allowed. Now you are indicating that funds moved from A to B by non reportable direct transfer for which there would be no 1099R. That would be OK. 
  • 2) First distribution in an RMD is the RMD and cannot be rolled over. It was rolled to TIRA A in this case, which is an excess contribution technically. The IRS does not know dates unless they do an audit.
  • 3) There is no problem with the TtoT transfer from A to B. But B would then be treated as if it were A because it holds the funds from A, so indirect rollovers out of B to another IRA within 12 months of the distributions that went into A would be a violation. I don’t know if later indirect rollovers were done from B to another account or not. Put another way, client could not have done rollovers out of A to another IRA, so the direct transfer from A to B does not whitewash B from this same restriction. The transfer itself is fine, but B is still restricted from outgoing rollovers for 12 months.
  • 4) You are correct. Cannot do that, but do not know if client did that or not.

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