One rollover per year violation? Or excess contribution?

Submitted by Jennifer Clark on Thu, 2023-09-14 20:42

Client withdrew IRA funds to buy new house, intending to re-deposit within 60 days after they closed on sale of old house. When they called to withdraw $210K, they were told that due to daily ACH limits, they could not take more than $125K/day. So they split their withdrawal to be $105K on day 1, $105K on day 2. On day 53, they re-deposited $210K to the same account, satisfying the 60-day rule. Have they violated the one rollover per year rule because of the daily ACH limit? If so, are we looking at an excess contribution situation on the replenished funds? Is there a way to report this on Form 5329 to avoid penalties?



Submitted by David Mertz on Thu, 2023-09-14 21:14

  • Yes, this is a violation of the one rollover per year rule.  Only one of the $105k distributions was eligible for rollover back to the traditional IRA.  The other $105k that was not eligible for rollover is now an excess regular contribution.  This other $105k could have been taxably converted to Roth to avoid a violation, but it’s probably too late for that now if it has been more than 60 days since day 2.  Since this other $105k was ineligible for rollover, it is includible in income.
  • Assuming that the distributions occurred in 2023, to avoid the excess-contribution penalty the excess contribution can be removed, accompanied by the net income or loss attributable to the excess contribution, before the due date of the 2023 tax return, including extensions.  (If the distributions occurred in 2022, they have until October 16, 2023 to obtain a return of the excess contribution if they timely filed their 2022 tax return or timely requested a filing extension.)
  • They likely could have avoided the limitation by making a $210k distribution to another account at the same financial institution that holds the IRA, then performing two $105 ACH transfers from this nonqualified account.

Submitted by Alan - IRA critic on Thu, 2023-09-14 21:48

  • Either the custodian is not aware of the one rollover rule or they felt bad because the client wanted to take the full 210k as a single distribution, but they should not have accepted more than 105k as rollover funds. Therefore 105k of the rollover is an excess IRA contribution. One possible solution is to roll the other 105k to their current employer plan if it will accept IRA rollovers, or if that is not possible another solution is to convert the 105k to a Roth IRA (still taxed but no penalty). However, by the time the excess is removed to fund the allowed rollover and moved to another plan, the 60 days will have likely passed if it has not already. 
  • There is no penalty exception to waive the penalty on the 105k taxable amount other than those listed in the 5329 instructions, but since the distribution (under 59.5) will be reported on 1099R code 1, the penalty can be reported directly on one of the 1040 schedules.
  • Possible aggressive and risky approach:  IRS PLR 2011 05047 seemed to overlook the one rollover limit in a case where a single distribution request was made piecemeal by the custodian over 2 days. And the same custodian just accepted both distributions back as rollover contributions. Does client feel lucky?

Submitted by David Mertz on Thu, 2023-09-14 22:08

The wording of the circumstances suggested to me that the client made two distribution requests.  If there was only a single distribution request and the financial institution simply made two transfers rather than the client making two distribution requests, then maybe the two transfers could be treated as a single distribution.

Submitted by Jennifer Clark on Fri, 2023-09-15 12:30

Thank you for the prompt feedback. Each of you have confirmed my assessment of the situation. Appreciate the suggested remedies and I will pass them along to the advisor who brought this to me. Disappointing that this occured the way it did. 

Submitted by Alan - IRA critic on Fri, 2023-09-15 15:25

Using the rollover rules to facilitate a real estate transaction often leads to disaster. This situation however differs from the more usual one where the sale of the former property is delayed and the 60 day period expires. 

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