Unintended Indirect Rollover
I have a client who was trying to start an annuitization stream from a 3rd party insurance company. His annuity account is an IRA and he submitted paperwork to make each annuity payment a direct transfer to an IRA at another custodian. The insurance company screwed up on their processing and sent him a big check with taxes withheld instead of executing as a direct transfer. Now, the insurance company is refusing to reverse the mistake and the client, who is in the top tax bracket, is stuck.
I told him the best path from here would be to treat this as an indirect rollover and deposit the net check in his other IRA. If I am correctly understanding how this works– Unless he can come up the roughly $25,000 in withheld taxes to put back in his other IRA (which he cannot) the $25,000 in withheld taxes will be treated as a distribution and he will have to pay taxes on that portion. (There will be no penalty because he is over age 59.5)
However, he will still get the $25,000 back as a refund when he files his taxes for 2019, so long as he can demonstrate all the other funds were deposited back into his other IRA. If that is all accurate, and please let me know if it is not, when the dust settles, the $25,000 will come back to him as a refund which can just be considered a $25,000 distribution as he will have already paid the tax on it. Does that sound right? Is there anything else I can do to help this client? He really doesn’t want to pay any taxes on this since he is in the highest tax bracket.
Permalink Submitted by Alan - IRA critic on Fri, 2019-12-20 23:33
First of all, in order to be able to do a 60 day rollover, the client must have one available. Since only one is allowed over a 12 month period, if he rolled over a prior distribution in the last 12 months, he cannot do another one. And if he CAN do the 60 day rollover he cannot do another for the next 60 days. Note that this rule applies to each distribution, but not to each rollover, therefore client could roll over the net amount received at two different times within 60 days. Another option if the client cannot come up with the 25,000 within 60 days is to use the self certification process outlined in Rev Procedure 2016-47 for reason of custodian error to allow enough time to come up with that 25,000. He would then report a full rollover on Form 1040.