IRA mess with multiple nuances and questions!
This was my original post.
First thank you very much for your help! I will try to make this short, but it is very convoluted. I had four pre-taxed retirement annuity accounts (One was a traditional IRA, one was a TSA that was converted to an IRA, and two SEP IRA’s) These annuities were housed with two separate companies. Three with one insurance company and one with another. After doing a deep dive on crypto currency I decided to rollover-transfer (Not sure of the exact terminology) to I-Trust Capital. At the advice of my stockbroker and longtime friend, and numerous talks with the insurance annuity companies they said that all four checks should come to me directly. My stockbroker-friend said he would deposit all the checks into a RJ account and then we could do a direct transfer-rollover to I-Trust Capital. Two checks came right away, and we did just that (Put with I-Trust Capital)
The third check came, and we did the same thing and put it with I-Trust Capital. While waiting for the fourth check I got a contact from my stockbroker-friend, and he said he messed up bigtime as the law had changed regarding how many checks in a 12-month period could come from custodian to a private individual-me. I immediately contacted the insurance company and said please do not send the final check to me and reroute it to my stockbroker for a custodian-to-custodian transfer-rollover which they did. I contacted my tax person and he said that I must roll the money of two of the checks into a ROTH IRA, and this would be taxed at an ordinary income rate as well as I would have to pay an IRS penalty. I am completely confused at this point and need some help as both my CPA and my stockbroker-friend have put me in a bad situation, and it looks like it will cost me about $ 12,000.00 including penalties. I am sure there are other nuances that could bite me in the butt: However, I believe this is everything.
Bottom line concerns! With my current custodian all my money is in a traditional IRA, hopefully the fact that I had monies in both an IRA and SEP prior to the rollover-transfer does not bite me in the rear. I am ok with paying the tax for the ROTH IRA conversion but am not happy about the IRS penalty for early withdrawal as I am only 53 and, in the end, I just wanted to put my money in what I consider to be a better place with a simple rollover-transfer. I hope this makes sense, sorry for the long windedness (A Lot of Nuance that may matter, that hopefully I did not exclude) and again, thank you very much.
This was the response that I received!
• There is no 10% penalty for a conversion, just the ordinary income tax on the taxable amount of the conversion. The IRS changed the one rollover limit from a per account limit to per taxpayer limit 7 years ago so your stockbroker apparently overlooked that. Direct non reportable transfers do not count as rollovers. and neither do conversions, which is why the only way out of this is to convert 2 of the distributions. The final, and presumably the largest distribution could still be a 60 day rollover providing you did not already use up your one permitted rollover in the prior 12 months.
• Was the account at I Trust to be a traditional IRA for the non Roth rollovers, and also a Roth IRA for the account that had previously been converted to Roth? Are the current Roth conversions to be made to a Roth IRA at I Trust? Was the account that was direct transferred the Roth IRA or another account?
This was my second question after getting the response above, but I have had no further advice. Please help!
THANKS AGAIN! A LITTLE MORE HELP PLEASE!
Thank you again in advance! Please allow me to get granular surrounding two items and I want to make sure that I have told you every nuance to ensure that I do not screw up any more than I already have. Your response: (There is no 10% penalty for a conversion, just the ordinary income tax on the taxable amount of the conversion. The IRS changed the one rollover limit from a per account limit to per taxpayer limit 7 years ago, so your stockbroker apparently overlooked that. Direct non reportable transfers do not count as rollovers. and neither do conversions, which is why the only way out of this is to convert 2 of the distributions. The final, and presumably the largest distribution could still be a 60-day rollover providing you did not already use up your one permitted rollover in the prior 12 months.) My Two Questions:1) The first question is about the IRS penalty of 10%: If I had four retirement checks, one check was a custodian-to-custodian direct transfer-rollover (I should be good so far), The second check came directly to me (I should still be good), The third and fourth also came to me directly which is the problem. All four checks were put in the same Traditional IRA which were all done within the 60-day period. I am now in the process of taking the exact amount of the two checks in question (I will call it an even $ 50,000.00) and I am converting that from my traditional IRA into a ROTH IRA. My CPA is telling me that I must pay the 10% penalty because, (although all the Traditional IRA transfers-rollovers were done within 60-days, I didn’t convert the money to the ROTH IRA within that 60-day time frame, it was more like 120 days and its completion will happen on the 15th of December 2021. I am not convinced he knows what he is talking about, so I am just trying to get you all the facts as am not sure if there are other nuances that I have not explained clearly and that is why I am getting two different responses. I hope this makes sense as I am struggling with this all around! 2) The second question is: Will there be a problem because two of the checks were SEP Ira’s, not Traditional IRA’s and they were all rolled into the Traditional IRA account instead of a SEP account (Will the co-mingling bite me, maybe better said has it already bit me)? Responding to your questions: Was the account at I Trust to be a traditional IRA for the non-Roth rollovers, and a Roth IRA for the account that had previously been converted to Roth?1) Initially all four checks went into one Traditional IRA account (Currently I am in the process of taking that $ 50,000.00 and converting that into a ROTH IRA and there will be two accounts including a ROTH and Traditional)Are the current Roth conversions to be made to a Roth IRA at I Trust? 1) Yes, let’s say for round numbers sake that all four checks totaled $ 100,000.00. I am converting $ 50,000.00 (which was the total amount of the two checks in question) into a ROTH IRA and leaving $ 50,000.00 in the Traditional IRA account for a total of two separate accounts. Was the account that was direct transferred the Roth IRA or another account?1) Originally the four accounts-checks were two SEP IRA’s and Two Traditional IRA’s I hope this all makes as I seem to explain myself better with the verbal word versus the written word. Thanks again! Brett
Permalink Submitted by Bruce Steiner on Tue, 2021-12-14 00:06
The law didn’t change (except that at one time the rule was one every 3 years rather than 1 every 12 months). Internal Revenue Code 408(d)(3), https://www.law.cornell.edu/uscode/text/26/408. It’s just that the IRS sometimes didn’t seem to be aware of it.
If it’s any consolation, the taxpayer who took this to the Tax Court and lost was himself a tax lawyer whom I’ve met (though his focus is state and local tax rather than Federal tax).
Permalink Submitted by Alan - IRA critic on Tue, 2021-12-14 03:36
Bad news. I thought that the two checks not eligible for rollover (except conversions), were deposited into a taxable brokerage account. Instead, they were rolled into a TIRA, which is not allowed for more than one 60 day rollover over a 12 month period. A direct trustee to trustee transfer where the check is not made payable to you is OK. Therefore, it sounds like the 3rd and 4th checks were rolled into a TIRA, and if so that created an excess TIRA contribution since those checks were not eligible for rollover due to the one rollover limitation. They should have been converted without first being rolled to a TIRA, and converted within 60 days. Since the two rollovers are excess TIRA contributions, they must be withdrawn as excess TIRA contributions with allocated earnings. The return of your 2 excess contributions must also include allocated earnings, and those earnings will be taxable and subject to penalty on your 2021 return. Probably not much in earnings if you recently did those two disallowed rollovers. In summary, the 2 checks made out to you should not have occurred, but when it did, your only choice left was a Roth conversion within 60 days. Instead those 2 checks were rolled into a TIRA, which blew up that plan and also the 60 days expired. It does not matter whether the IRAs were SEP IRAs or not, same rules.
So stop the conversions if you can. It is too late and the money in the TIRA is now an excess contribution which can only be corrected if it is removed as an excess with allocated earnings. Converting would create a bigger hole to dig out of.
To make sure the situation is not even worse, my understanding is that one of these 4 checks was made out to your IRA custodian (or transferred directly to the new custodian), either way that one check was not payable to you personally. I want to be sure that one qualified as a non reportable direct transfer, and not a rollover. The term “transfer- rollover” is not a transaction, it must be one or the other. A transfer is not reported to the IRS by you or the IRA custodian, while a distribution and rollover must be reported by both.
So as it appears to me now, if each of the 4 checks were for 25,000, you would have 25,000 moved by direct transfer, 25,000 by 60 day rollover, both of these non taxable. The last 2 checks were not eligible for 60 day rollover, so you must have them returned as excess IRA contributions with allocated earnings. You would owe tax and penalty on the 50,000 plus any earnings (probably very small amount) that came out with the 50,000.