EXCEPTIONS TO the 1 IRA ROLLOVER RULE due to a Failed Bank Distributions

Submitted by CHARLES MULLER on Wed, 2017-05-17 18:23

I had 6 different IRA accounts invested in 6 different CD’s at a bank. The bank that held my IRA’s went under and the FDIC took over and issued to me (without my authorization) 6 separate checks payable to my name with the IRA account designation on it.

I am over 60 years old and did not want to take this IRA money and wanted to leave it in the IRA account. However, the FDIC said it had to issue the separate IRA checks.

Question: I know they changed the rollover rules effective 1/1/15 allowing only 1 IRA rollover per year per taxpayer, so can I roll over all 6 checks IRA checks with in the 60 day period and not be subject to paying income tax on the 5 IRA rollover checks in excess of the 1 allowed rollover per year and also not have to pay an excess IRA contribution penalty of 6% if the new bank takes them as IRA rollovers? Is there some kind of relief related to forced IRA rollovers from failed institutions? How should I handle this on my tax return?

Any help is greatly appreciated. If need more info you can call me 504-957-3010.
Thank you.



Submitted by Alan - IRA critic on Wed, 2017-05-17 18:59

  • Deposit the checks in your checking account, then open a Roth IRA if you do not already have one. Make a single Roth conversion contribution within the 60 day time period. Assuming that you do not want to keep the conversion or all of the conversion, you can then recharacterize the conversion back to a TIRA account  whenever you wish before the recharacterization deadline. For a 2017 conversion that deadline is 10/15/2018. If you are going to recharacterize right away, just invest in a MM account and do not put the money in a CD until this two step procedure is complete. If you have a brokerage IRA with a non bank custodian, that would be the place to  set up the Roth IRA and the TIRA to receive the recharacterized conversion. This is about the only escape hatch option for the one rollover per 12 month limitation. Conversions do NOT count for purposes of the one rollover limit.
  • You may get several 1099R forms from the FDIC or original bank for the distributions you received. You will also get a 1099R for the recharacterized conversion, and if you recharcterize this year the total of all 1099R forms would go on line 15a of Form 1040, 0 on 15b and “rollover” entered next to 15b. An explanatory statement indicating the dates and amount of the conversion and recharacterization must also be added to the return. No need to mention anything about the FDIC distribution or why you did the conversion either on your return or to the IRA custodian you use for the Roth conversion/recharacterization.
  • If you still want to use a bank, be sure it is one that understands that you will probably recharacterize the conversion very soon. Do not open a CD until the money is back in the TIRA account.

Submitted by William Tuttle on Thu, 2017-05-18 00:01

  • Alan’s solution is a guranteed way (if a little convoluted) to get the result you want. Do not let the 60-day window go by without doing this or a better result.
  • Some additional thoughts. This is a pretty egregious result beyond your control.
  • When did this occur? Did you deposit the checks yet? Do you still have some time for corrective actions to be taken?
  • The FDIC stated that they had to issue 6 checks. Have you asked the FDIC if they will reissue 6 those checks directly payable to your IRA at another financial institution?
  • Time is of the essence, but maybe a call to your congressman’s or senator’s constituent service maybe an option.
  • Let me repeat. Alan’s solution is guranteed to resolve the situation and leave you with all the funds in an IRA. Do not miss the 60-day window in search of a perfect plan.
  • I only suggest the other options if this happened very recently and you have some time with an adequate safety margin to try to get the FDIC to do this in a more advantageous manner.

Submitted by Ben Meyer on Thu, 2017-05-18 17:50

If the distributions were from a Roth IRA rather than a traditional IRA would there be any way to avoid receiving a distribution (other than a PLR)?

Submitted by Alan - IRA critic on Thu, 2017-05-18 18:11

Benn, there is no way so the FDIC needs a wake up call to eliminate making distributions. Like a small balance in an employer plan that the plan wants rolled into an IRA, they need to set up an arrangement with a large IRA custodian to establish an IRA account for the IRA owner to receive a direct transfer into such account rather than a reportable distribution. 

Submitted by Jose Morales on Fri, 2017-05-19 16:58

What is the name of the financial institution?  The FDIC should have on it’s website a notice such as this:  https://www.fdic.gov/bank/individual/failed/hamilton.html#Notice Regarding Distributions”Please also note that, generally, you can receive a distribution from a traditional IRA and make a rollover contribution (of all or part of the amount received) to another traditional IRA only once in any one-year period. To the extent that such waiting period might otherwise apply to you and result in a taxable distribution because you have made a tax-free rollover within the past year, you should know that an exception to the one-year waiting period rule has been granted by the IRS for distributions made from a failed financial institution by the Federal Deposit Insurance Corporation.”The FDIC should be issuing the 1099R (and it will only be one 1099R) for the total amount distributed to you.  Alan’s suggestion is a sure fire way of “correcting” this, although I strongly believe you could also deposit all of the checks into your checking account and then simply roll over the sum total to a new IRA and you would be fine as well even if the FDIC did not obtain a waiver to the 1 rollover per year rule for your particular failed financial institution’s IRA distributions.  The individual CDs were all certainly contained within one IRA Plan and not held as separate IRA plans for each CD, and the 6 checks represent one distribution from your plan.  But again, Alan’s method is a guaranteed way to avoid any issues if the FDIC’s failed bank notice for this financial institution does not contain a specific waiver to the 1 per year rollover rule from the IRS.

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