60-day rollover

Submitted by Dennis Prout on Tue, 2014-03-11 12:46

A client has an IRA with a mutual fund company. An automatic annual RMD is set up on the account. However, before the scheduled date of processing of the auto RMD, she processed a QCD to satisfy the RMD. When the scheduled RMD came out later in the year, she returned the check to the mutual fund company uncashed to have the funds reapplied to the IRA, since she had satisfied the RMD with the earlier QCD. This took place in March.

In October, she cashed in another IRA, with the check payable to her. She then put that money into her mutual fund IRA within 60-days as a rollover. However, the mutual fund company is treating the return of the check in March as a 60-day rollover as well. We have a situation where the mutual fund company is showing two 60-day rollovers within 12 calendar months.

Is the mutual fund oompany correct in treating the return of the uncashed check in March as a 60-day rollover?



Submitted by Alan - IRA critic on Tue, 2014-03-11 15:34

  • No, they are incorrect. The mutual fund company IRA received two rollovers, one distributed from that account and one from a different IRA. If the order of these two rollovers was reversed, there would be a violation, but Pub 590 indicates that an IRA that receives a rollover contribution (the first rollover) cannot make a later distribution that is rolled over. This account did not make a later distribution, it just received a rollover from a different IRA. Refer them to p 25 of Pub 590 with respect to the waiting period.
  • Note that because of a recent tax court ruling, it is possible that the mutual fund company is now treating all IRA accounts as combined for the rollover rules. That would result in client being limited to only one rollover from all their IRA accounts. This ruling runs contrary to the IRS own interpretation in Pub 590 and needs clarification. It will be interesting if the mutual fund company does not understand the original rollover rule in Pub 590 or if they have moved to adopt the tax court decision of only one month ago retroactively.
  • Where are these rollovers now? The tax court decision was only last month, after both distributions. Is the mutual fund account still holding both rollovers?  They evidently accepted both of them? What action are they taking if they still hold those rollovers?

Submitted by Jose Morales on Tue, 2014-03-11 16:11

Hello Alan,  I think you may have meant that while they are correct in treating the return of the automatic distribution in March as a rollover, it should not prohibit the second rollover to the account in October since the source of funds was from an entirely different IRA than from which the March distribution came from (if you follow the examples in Publication 590).  So, yes they are both rollovers to the same IRA within 12 months, but the source of the distributions is different which makes all the difference.  The Bobrow ruling wasn’t surprising to me since both IRAs form which the distributions took place were held at Fidelity and from all of my conversations with the IRS and various IRA experts all indicated that separate accounts within one IRA Plan at a single IRA Custodian would all be considered the same IRA for the purposes of rollover restrictions.  I know that there were just as many people that held the belief that you could split your IRA holdings into separate accounts within the same IRA held at the same IRA Custodian in order to allow for multiple rollovers, but I’ve always cautioned that you really need to know with 100% certainty that the IRA Custodian actually considers these separate IRAs rather than one IRA holding multiple accounts.  What was surprising about the ruling was the reasoning used and the interpretation that an individual is literally only allowed one rollover, across all IRAs, within a 12 month period.

Submitted by Dennis Prout on Tue, 2014-03-11 16:15

Yes, the mutual fund company is holding both rollovers.  The client is confused because she received a 1099 from the mutual fund company showing taxable distributions in the amount of the original QCD plus the auto RMD check that was returned. Of course she also has a 1099 from the other IRA account showing a taxable distribution.

Submitted by Jose Morales on Tue, 2014-03-11 17:06

That would be correct.  The QCD and the automatic distribution amounts should be listed as one total distribution amount on the 1099-R.  Of course the automatic distribution amount was rolled over, offsetting that portion of the distribution.  The same would apply to the 1099-R from the other IRA account.  On the client’s tax form they would list the total of the IRA distributions then on the next line the taxable amount would be the total, less the rolled over amounts.  You can then write the word “rollover” next to this lower dollar figure to let the IRS know the difference is due to a rollover of withdrawn amounts.

Submitted by Alan - IRA critic on Tue, 2014-03-11 16:33

  • urusei, yes, that is what I meant in the first bullet point, ie there should not be a problem with both these rollovers UNLESS the institution is now going by Bobrow retroactively. But I would like to know how that institution is proceeding if their position is that the second rollover was not allowed. They apparently accepted it at the time. Maybe they plan on not reporting the second rollover contribution on their 5498. Obviously, the client should call the fund company and fully understand what their position is, and if Bobrow is not the problem here, then the fund company should be convinced of their error ASAP.
  • My interpretation of Bobrow is that the tax court considered all owned IRAs of an individual regardless of the number of custodians as one combined account for purposes of the rollover limitation. But reading the case, I got the impression that Bobrow himself as a tax attorney intentially set up a strategy to borrow continuously from several IRA accounts, and then took an arrogant posture with the IRS to challenge them. So I think there was an element of ego in this case, and it may just never be followed up with a revision of the Pub 590 wording. Currently, an individual probably has nothing to fear with an innocent case such as this one, but an individual who intentially sets up multiple IRA accounts by transfer and then does a rollover from each of them could run into trouble similar to Bobrow.
  • As a separate point, people seem to be reporting increasing problems resulting from so called automatic RMD agreements, either due to their own actions or the custodians. I wonder if the agreements substitute some new exposures in place of  overlooking the RMD.

 

Submitted by Jose Morales on Tue, 2014-03-11 17:19

I would also be surprised if anyone who isn’t obviously trying to structure a method of continuously taking distributions from their IRA has an issue from the IRS.  However, in recent years the Treasury department has been very vocal about addressing the out of control non-compliance with contribution and distribution rules on IRA accounts.  I wouldn’t be surprised to see escalated enforcement for those over 70 1/2 who rollover their RMDs.  It’s an issue we constantly deal with, especially so in the early part of the year when a new client is used to taking their RMD at the end of the year but is informed that they must complete it prior to our accepting their rollover.

Submitted by Dennis Prout on Tue, 2014-03-11 17:46

Thank you to all who posted in this discussion.  Incredibly helpful, and we can now advise our client much more intelligently!

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