Accidental IRA Distribution
Hello-
Client accidentally took an IRA distribution from two separate Traditional Rollover IRAs at the same custodian. My understanding is they can choose to recontribute one of the disbursements as an indirect rollover but the other one would be taxable income to them. Is that correct?
Thank you!
Permalink Submitted by David Mertz on Mon, 2022-04-11 18:48
That’s correct unless they have an employer plan to which they can roll over the other distribution. Rollovers to an employer plan like a 401(k) are not subject to the limitation.
The other option is to convert the other distribution to Roth. Roth conversions are not subject to the limitation. Tax would still be due but there would be no early-distribution penalty and the growth in the Roth IRA would be tax free once the requirements for qualified distributions are met.
Permalink Submitted by IRAQuestion5 on Tue, 2022-04-12 14:43
They are over the age for early distribution penalty. Are you saying we can make a deposit to their Roth for one of the distribution amounts and treat that as a conversion even though the money went to their bank account first (Traditional IRA to checking to Roth IRA?). If so, does that just have to be done in the same 60 days?
Permalink Submitted by Alan - IRA critic on Tue, 2022-04-12 16:04
Assuming that they cannot do a 60 day rollover to their employer plan, which would resolve the problem without taxes due, the Roth conversion is the remaining option. They have 60 days from the date of receipt of the distribution they wish to convert to complete the conversion. Since they are over 59.5, the tax cost of a taxable distribution and the conversion will be the same, but the funds will end up in a Roth IRA instead of their taxable account.
Note that the deadline for action is 60 days from the date of receipt of the first distribution. Only one distribution can be fully or partially rolled over to avoid taxation, and any remaining amount could either be converted or placed in taxable or some combination thereof. Options are flexible except that only one distribution or a portion thereof can be rolled over to another TIRA.
Client should carefully work out a plan of action. Start by making note of the receipt date for each distribution, the rollover deadline 60 days later, and the amount of each distribution. Then make the rollover type decisions. If the second distribution received is the smaller one and that one will be converted, there is nothing preventing doing the conversion first, as long as the larger first distribution is also rolled to a TIRA within 60 days.
Options to approach this situation dramatically change if client is QCD age or RMD age.