Big Problem with Inadvertent Indirect IRA rollover

Submitted by Robert Wander on Sun, 2018-12-30 18:59

A 96 year old client did an indirect rollover in November of this year from his Vanguard account in the amount of $200,000 with the funds sent to his Chase bank account and then rolled over to his Fidelity IRA account. Because of his age and issues getting him to sign and mail forms for a trustee to trustee rollover, it was more expeditious to do it this way. Unfortunately, he just took another IRA distribution from the same Vanguard account in the amount of $240,000 to his same Chase account with the intent of also rolling over to his Fidelity IRA but this of course violates the relatively new rule limiting such rollovers to once every 12 months.

In light of his advanced age and severe memory issues, and the fact that he was not doing this as an interest-free loan, which I know was the loophole this IRS reg sought to eliminate, I would think there must be a way for the IRS to deal “equitably” with this situation.

Looking for any advice or resources/professionals to consult with on this



Submitted by David Mertz on Sun, 2018-12-30 19:21

The IRS has no authority to waive the once-per-12-months rollover limitation.  Assuming that the distribution was from a traditional IRA, the client could deposit the money into a Roth IRA as a conversion contribution, but would still be responsible for paying the taxes on the conversion.  Doing a Roth conversion could end up being beneficial to the client or the client’s beneficiaries in the long run since growth in the Roth IRA will be tax free if the holding requirement is met.  This would be far preferable to just paying the tax and leaving it in a taxable account.

Submitted by Alan - IRA critic on Sun, 2018-12-30 19:40

  • Unfortunately, the IRS has no authority to waive the one rollover limitation like they have provided with the 60 day time limit.  This is exactly the situation that Natalie Choate indicated would cause trouble immediately after the IRS altered their interpretation of the limit 4 years ago. However, it should be noted that the former IRS interpretation of the 12 month limit applied separately to each IRA account and since the client took two distributions from the same VG IRA account, this would always have been a violation of the one rollover limitation. You do not hear that much about these infractions because the IRS basically expects IRA custodians to enforce this rule by refusing to accept obvious additional indirect rollovers.  Not clear whether Fidelity would have refused to accept a rollover contribution of this second distribution or not.
  • The only legal option with the second distribution is to convert it to a Roth IRA since conversions are not subject to the one rollover limit. The second distribution will still be taxable, but having this balance in a Roth IRA will eliminate future RMDs on this amount and would help his beneficiaries who would inherit a Roth IRA instead of a traditional IRA. They would still have to take beneficiary RMDs, but they will be tax free instead of taxable and they could stretch the inherited Roth over many years. A conversion would therefore provide a limited amount of damage control long term.
  • Note that he has 60 days from the date of the second distribution to decide to convert or not. A conversion completed in 2019 but within 60 days will reduce his 2019 RMD by over 50,000 because he can use the actual reduced 12/31 TIRA balance to calculate the 2019 RMD which is over a quarter of his TIRA balance at age 96.
  • Finally, doing these 60 day rollovers will also have RMD implications if he has not completed his full 2018 RMD before rolling over the first distribution.

Submitted by Robert Wander on Sun, 2018-12-30 21:06

Thanks so much for your quick and thoughtful responses and certain a Roch conversion may be the best option, as unpalatable as paying a large tax this year is.  That said I was kind of hoping there might be some “wiggle room” with the IRS in the interest of fairness, if that’s not an oxymoron here.  I saw below from another website as regards the 60 day limit rule pre-2016 and was hoping there might be a possibility of requesting a “hardship exception” in light of his mental challenges:Before 2016, a taxpayer’s only option, if he or she did not fall under the qualifications for automatic approval, was to apply for a hardship exception. The IRS has authority to waive the 60-day rollover requirement in cases where “the failure to waive such requirement would be against equity or good conscience” including casualty, disaster, or other events beyond the reasonable control of the taxpayer (death, disability, hospitalization, incarceration, postal error, restrictions imposed by a foreign country, etc.). The IRS considers all relevant facts and circumstances when determining whether to grant a waiver

Submitted by David Mertz on Mon, 2018-12-31 00:17

The law explicitly gives the IRS the authority to waive the 60-day rollover deadline for reasonable cause, but not the one-per-12-months rule.  What you quoted is the IRS notice allowing custodians to accept rollovers after the 60-day deadline if the individual self-certifies that they would qualify for an IRS waiver based on their circumstances; there have been no recent changes to the law itself in regard to IRA rollovers.

Submitted by Alan - IRA critic on Mon, 2018-12-31 03:39

  • Yes, if you review Sec 2 (Background) of the following Rev Procedure, it outlines the history showing where the tax code itself authorizes the IRS to make exceptions to the 60 day rollover requirement, which they did over the years in two Rev Procedures before 2016-47. Unfortuneately, no such authority exists for waiving the one rollover per 12 month limit.
  • https://www.irs.gov/pub/irs-drop/rp-16-47.pdf

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