Breaking the 2 Rollovers per 12 month rule?
I have what might be a somewhat unique problem with a traditional IRA. I contacted the trustee of one of my IRAs, Touchstone, in February 2018 and told them that I would like to transfer my IRA to my other traditional IRA at Vanguard. The person from Touchstone asked me if I would like to transfer it electronically or via check and I chose check. The letter arrived in a few days with a big surprise inside. There were two checks. Apparently somehow over the course of many years the IRA money, contained in two different mutual funds was categorized under two different account numbers. However when I would log into my account at Touchstone over the years I could see both funds on the same page.
I contacted Touchstone about this and although they apologized to me about not explaining that I would receive two checks they said there was nothing they could do about it now. I was not aware that there could be a problem with two checks. I called the IRS and they told me it would all come down to if Touchstone decided to issue two separate 1099-R or one. When I called Touchstone about this issue I was given the run around on the issue and I never got a straight answer out of them.
The checks had been made out to (IRA R/O “my name/address”) and on check 2 (IRA A/C “my name/adddress”). I sent both checks to Vanguard within the 60 day time frame and they deposited them in my IRA. I did discuss this with Vanguard at the time and in my account they have one of the checks listed as “employee rollover” and the other as “employee asset transfer”. I have no idea what the significance of that is.
Now, in early 2019 I have received two separate 1099-R’s from Touchstone. I was 61 years old at the time I transfered the IRA so I know I can remove one of them from Vanguard and pay the income tax on it as if it were a normal distribution. The problem is in 2018 my income jumped considerably due to long term capital gains. My normal AGI is only around $80k but due to these capital gains it is close to $300k. When I put the second check (the lower amount check) into my software as an IRA distribution it showed I will be paying around $2800 tax on a $9000 check! That defeats the whole reason I took the IRA in the first place. In a couple years after retirement I will certainly be in a lower tax bracket and would have payed closer to $1000 on this IRA distribution.
Needless to say I am extremely displeased with the professionalism of the Touchstone Mutual fund company. I haven’t yet removed the money from Vanguard as it is only April 5, 2019. I do have the option to use $6500 of the $9000 as my 2018 contribution to an IRA but due to my income level I believe it would be nondeductible so there is really no point to that. I also believe that if I take an extension I can prolong the agony of this whole mess.
Another option that I can imagine is to leave both of the Touchstone IRA’s where they are at Vanguard and take a chance that the IRS will be understanding about the situation. I could attach an explanation along with my return and hope for the best. The problem here being that if I do this and the IRS has no empathy for me that I will be hit with the 6% penalty for not withdrawing the funds before the tax due date.
Incidentally, in the past I have had extremely good experiences when calling the IRS help line. Their knowledge and professionalism and general helpfulness has always impressed me. However, a couple days ago I called and what a shock! The fellow I spoke with although very polite was clearly uninformed and really was just reading answers and spent a lot of time looking up information and asking others for help.
My inclination is to bite the bullet, pay it and chalk it up to experience. But maybe there’s a better path. I don’t know if the IRS keeps records on me but I have always been honest and tried to pay my fair taxes and I’ve never had any problems with them. Who knows? If you can give an opinion one way or the other on this I will greatly appreciate it.
Permalink Submitted by Alan - IRA critic on Sat, 2019-04-06 00:22
As you probably know, you should have insisted that these funds were moved by direct trustee transfer. You can do an unlimited number of them and there is no 1099R and no reporting on your return. Now, a check made payable to your IRA or better yet to “Vanguard FBO your IRA” is a direct transfer whether mailed to you or not. As long as these checks were not made payable to you personally rather than to your IRA, they are direct transfers and Touchstone should NOT have issued a 1099R on either one. From your description, VG apparently views one of these checks as a direct transfer (“asset transfer), but not the other. This difference probably relates to how the checks were made payable. But all you need is for one of them to be a transfer and you are OK because you are allowed to do one 60 day rollover over a 12 month period. I suggest getting as much documentation as you can, including a completely accurate description of the payee on each check. By the end of May you should have any 5498 forms issued by VG. The IRS matches up 1099R forms with 5498 contribution reports from the receiving custodian (VG). Right now you might call VG to get verification that they will NOT issue a 5498 for the “asset transfer” amount, and also ask them why this does not also apply to the other check if it was actually made out to your IRA and not to you personally. Once all the info is consistent, file your 2018 return reporting both rollovers and include an explanatory statement that the 1099R form (or forms) are in error because the funds were moved by direct transfer and there was NO distribution paid to you. You can also state that there is no matching 5498 for the same reason. That said, all you need is one of them to be treated as a direct transfer and you are OK as long as you did not do another 60 day rollover in the last 12 months in addition. Then resolve only to move funds by direct transfer in the future. For example, if you want to move funds from VG to Fidelity, initiate the transfer at Fidelity and have them “pull” the funds over from VG. And stay away from firms like Touchstone and most banks, since these are the firms that typically make these errors. Large brokerage firms rarely make such errors.If you file your return by 4/15, you will automatically qualify for the extended due date of 10/15 to withdraw the excess contribution if everything falls apart and you discover that the 1099R forms were both correctly issued. Again, you MUST report the income from the two 1099R forms on your return because the IRS computer will be looking for that income. But also report them as rollovers to avoid taxation. You could either include an explanation with that return (or extended return if you file an extension by 4/15) or say nothing and keep your documentation until such time as the IRS contacts you. Good chance they will not. Your choice. Any other questions please advise.
Permalink Submitted by John Kelleher on Sun, 2019-04-07 15:17
I really appreciate you generous response. I think I will give VG a call on Monday and ask about the 5498’s. If that looks good then I will just file an extension and wait to recieve one to make sure. That will leave my options open in case something goes wrong. I believe, as a last resort, I can always claim $6500 of the check as a non-deductable IRA deposit and then I would only be stuck with paying the 6% penalty on the remainder of approximately $2500. But I tend to think you will be right and they will accept it if the VG paper work matches up. Thanks again for your help and expertise and I will post back here with the results.
Permalink Submitted by John Kelleher on Mon, 2020-03-02 20:03
Well I followed your advice and included a short note explaining the issue and just as you said the IRS had no problem with it. What a relief that was for me. I will also be taking your advice Ed and stay away from the smaller funds like Touchstone. This was one headache I don’t want to repeat.Thank you again for your sage advice Ed and I wish you the best! John