Early distributions and rollovers need help

Submitted by Jennifer Bloom on Sat, 2015-08-01 02:49

I need your advice on what I can do, if anything; to solve or mitigate a problem that I have caused with my IRA. I am under 59 1/2 and not eligible to take IRA distributions. I am worried that I have inadvertently broken the “only one rollover in 12 month” rule and hope there is a way I can correct the issue.

I have two IRA’s, one that was rolled over from a 401k 3 years ago; and one small Roth IRA.
In the regular IRA I took an early distribution of $10k in February 2015 (cash flow problems). The Early distribution was sent by wire directly to my external bank. About a week later I realized I could find the money elsewhere and did not need the 10k, so I rolled it back to the IRA (wire from my bank).

In June I decided that I needed to have more money in the Roth IRA, approximately $100k from my regular IRA to go into the Roth IRA. I should have done a transfer directly at the company (trustee to trustee) but instead, I took an Early Distribution again (wire to my external bank) and subsequently did an employee rollover conversion from my bank directly to the Roth IRA.

This gets better. I do not have the money to pay the taxes for the conversion (another job loss) and now I also realize that I may have broken the “only one rollover in 12 months” rule. I’ve read and reread many blogs and the IRS regulations and I am struggling with understanding the way forward.

Possible solution? I wonder if there is a way to put the 100k back into my IRA? My question: Now that the $100k is in my Roth IRA, can I recharacterize the transaction as it should have gone to the regular IRA (the point of origination)? If I recharacterize the 100k roth conversion and ultimately the money goes back to the regular IRA, am I breaking the new IRA rollover rules? In writing this and thinking through it, I realize that I have made a mistake in thinking I was ok to do multiple rollovers, but I am now in damage control mode and need some advice please.



Submitted by Alan - IRA critic on Sat, 2015-08-01 16:21

  • No need to worry. Your Roth conversion does not count as a rollover against the one rollover rule. So you still only have one rollover in the last 12 months. You cannot do another one until March, 2016. But you can do as many conversions as you wish. although it certainly sounds like this is not the time for conversions unless you have alot of money to pay the taxes.
  • Now for the conversion – you can recharacterize it back to a TIRA up till 10/15/2016, so there is no rush right now. You might wait awhile to see if you get another job. The recharacterization does not count as a rollover even though the result is that the conversion money along with any earnings goes back into your TIRA. You can do partial recharacterizations also, for example the first few thousand dollars may be taxed at a low rate due to less income from the job loss. You also may want to look at the gains or losses on your conversion, since gains must also go back to the TIRA. If you have a loss on your conversion, it is more common to recharacterize so you do not have to pay taxes on conversions amounts which have now been reduced due to investment losses.
  • Bottom line, you have choices to make but you have not violated any rules.

Submitted by Jennifer Bloom on Mon, 2015-10-12 17:26

I cannot tell you how thankful I am for your advice.My only lingering worry about this (and maybe I am over-thinking) is given the above scenario, I took an early distribution of $100k to my external bank from the Roth IRA; then the next day I wired it to my Roth IRA (prior to the recharacterization).Since I wired it to my external bank (instead of doing a direct transfer) won’t I get a 1099-R and be in trouble?  Maybe I am wrong (and I hope so).  Thank you ever so much.

Submitted by Alan - IRA critic on Mon, 2015-10-12 19:52

Am confused about the chain of events now. In your former post you indicated doing an indirect rollover from your TIRA to your Roth IRA. Nothing was said about also taking a 100k distribution FROM your Roth IRA – or in the last post did you mean that the 100k distribution was from the TIRA and the same conversion discussed all along? If so, you WILL get a 1099R showing the distribution, but you will also be reporting a conversion on Form 8606 and the IRS rules are very clear that a conversion does NOT count as a rollover for purposes of the one rollover rule. Further, had you done the conversion by direct transfer, you would also get a 1099R because it was a conversion. Hopefully, there was NO distribution from the Roth IRA, just the recharacterization if you have already done that.

Submitted by Jennifer Bloom on Tue, 2015-10-13 00:16

Hello and I apologize for the mistake in typing and I appreciate your help.I took a distribution from the IRA (not the Roth IRA) of $100k.  The distribution was an early withdrawal, electronically wired to my bank (share account).  I then sent it to my Roth IRA as an employee contribution (rollover).  The entire amount, I did not keep anything.I then did a recharacterization from the Roth IRA back to the IRA.So maybe I am ok?Again, thank you and I appreciate your help.  

Submitted by Alan - IRA critic on Tue, 2015-10-13 01:04

Yes, no problem there. You have not violated the one rollover rule, and the 1099R will not cause you a problem. Since you recharacterized the entire Roth conversion you will not be reporting the conversion on Form 8606, but you will need to include an explanatory statement with your return. The statement should include the date and amount of the conversion, and the date and amount you recharacterized as well as what the conversion was worth when you recharacterized it. This latter figure is what will show on the 1099R that reports the recharacterization. You will get the two 1099R forms in late January.

Submitted by Jennifer Bloom on Tue, 2015-10-13 15:09

Hi Thank you again for your tremendous help.I knoww that I will not need to report the conversion on form 8606, but am wondering if any other special forms will be required, such as the IRS form 5329?

Submitted by Alan - IRA critic on Tue, 2015-10-13 17:35

No other forms needed, just the explanatory statement.

Submitted by Jennifer Bloom on Wed, 2016-03-30 22:57

Hello and thank you for your help. My tax guy says I need to mail in my taxes with the explanatory statement, because his software keeps stating that I had two rollovers in the same year, and wants to charge me a penalty.  I have explained that the second one is a transfer and is not a rollover.  He says he is unable to send it automatically and that I have to create a statement explaining the situation; and mail it in.  By the way this is H and R Block so I am surprised.  Maybe it is a limitation of the 2015 H and R Block software they use in the various locations?  Any thoughts are appreciated.

Submitted by Alan - IRA critic on Wed, 2016-03-30 23:48

  • I would request to have another HR Block more senior staffer review your file, because this is just a routine situation that should be easily handled by their tax program including the explanatory statement regarding the conversion and subsequent recharacterization.
  • The 1099R from the TIRA probably shows 110k distributed. This should probably be entered as two transactions in the program, 100k as a conversion and 10k as a distribution and rollover. The recharacterization also needs to be entered and there should be another 1099R for that on the Roth IRA. Entry of the recharacterization will eliminate the conversion and there should be no 8606 generated. The 1040 should show 110k plus the amount on the recharacterization 1099R on line 15a, 0 on 15b and “rollover” entered on the line next to 15b. There should be no tax or penalty for these transactions. The program should also provide a screen to enter the explanatory statement regarding the conversion/recharacterization and should allow e filing of the return.
  • Someone there who is more familiar with the program should be able to figure this out. Be sure they know that you only converted 100k because they could not figure that out just from the documents you already received.

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