12-month indirect rollover rule
Client has IRA A and IRA B. If they take a full distribution from both accounts, and indirectly roll them to IRA C (within the 60-day window), have they busted the 12-month rule? I think client has?
If so, I am wondering if the custodian of IRA C would ever have reason to know that, and reject some or all of the money.
If I take a check for $45k from IRA A, and $55k from IRA B, and then send my own personal check for $100k to custodian for IRA C, attesting on the account paperwork that this is an indirect rollover completed within the 60-day window, how would custodian know that this money came from two separate accounts?
In other words, how would custodian know that some of the $100k was an ineligible rollover amount? They wouldn’t have any reason to know, would they?
Permalink Submitted by Alan - IRA critic on Wed, 2021-08-18 20:36
Yes, you are correct. Whatever enforcement of the one rollover limit that exists is mostly done at the custodian level, with varying attention given to this by different custodians. The situation in your first paragraph allows only one of these distributions to be rolled into an IRA, but the custodian would not be aware that the source was two different IRA accounts unless they specifically asked. However, in this case with two 1099R forms issued, the IRS itself receives these 1099R forms and could easily see two different account sources and that the total was reported as a rollover on Form 1040. They easily could, but I suspect this might not be on their radar.
A frequent exposure to this is older folks with bank CDs, all with different account numbers that produce separate 1099R forms. And these CDs are likely to be large, so the legal effects of this limitation can be devastating. And if retired these taxpayers do not have access to one of the fixes for this problem, which is rolling the additional distributions over to their current employer plan if it accepts IRA rollovers. Or plan B would be to at least convert the additional distributions since conversions are not subject to the limit.