Indirect Rollover Mistake – How to fix?

Submitted by Emily Hancock on Wed, 2024-02-07 01:24

We needed $100k for less than two weeks during a house purchase. My husband took distributions from his two traditional IRAs on the same day, at the same time (or within a few seconds of each other), from the same trustee (Vanguard), one for $75k and one for about $25k. The funds were received within seconds of each other and then were replaced within the 60-day limit, again at the same time and back to the same accounts. He could have consolidated the two IRAs within Vanguard with a couple of clicks, and then made a single withdrawal of the full amount, but he didn’t think to do so at the time – he had read and misunderstood the statement that “all of a person’s IRAs are treated as one” for purposes of the one-year indirect rollover rule.

We’ve started looking into filing our taxes and are worried about a violation of the one-year rollover rule. Is this an issue given that both distributions were made at the same time on the same day (from accounts that could have been combined with a simple transfer), and the rollovers occurred at the same time too? If so, are we able to re-classify the $25k rollover as an early distribution and pay the associated taxes and fees, or is there some chance that the IRS decides the $25k was the valid rollover and the $75k is the early distribution? Thanks to anyone who can help!



Submitted by Alan - IRA critic on Wed, 2024-02-07 02:06

  • It’s a violation of the one rollover rule and VG apparently did not catch it before accepting the second rollover. Therefore, the second distribution is taxable and must be removed from the IRA that received it as an excess contribution, except to the extent that he qualifies for a 2023 TIRA contribution that he did not make. Further, because two 1099R forms were issued, one for each IRA account, reporting a rollover of the total amount is sort of a red flag for the IRS.
  • Any chance for damage control?  Probably not, but just in case, what was the date of these distributions, did the home purchase qualify as a “first home”defined as a home purchase when neither of you owned a home in the past 2 years, and did the purchase the distribution was intended to pay for fall out so that the purchase could not proceed? Just fishing here to see if there is any damage control possible.
  • If not, there should be no problem treating the 75k rollover as valid and the 25k rollover as the excess contribution.

Submitted by Emily Hancock on Wed, 2024-02-07 03:25

Thank you so much for responding!No damage control, unfortunately, the distributions were in May and it wasn’t our first home. But being able to keep the $75k as the rollover and take the hit on the $25k would at least avoid the worst-case scenario.It sounds like we need to talk with our tax preparer about doing a corrective distribution on the $25k, plus the $3k it’s now earned, less $6500 (because he hasn’t made any IRA contributions yet for last year) before we file. We’re hoping if the IRS sees the amount from the $25k 1099R declared as taxable, and the amount from the $75k 1099R declared as a rollover, we won’t end up in an audit where they’re scrutinizing time stamps from Vanguard to figure out which distribution occurred “first” (because I think it was the $25k, by a matter of seconds).

Submitted by Paul Dion on Sun, 2024-02-11 00:45

I volunteer as a tax preparer with VITA, preparing returns for those with incomes below $70, 000.  A client had two 1099R’s, one for the initial distribution from an inherited IRA and properly titled to her with the decedents name.  She cashed it and within a week, deposited it into from her checking account to a newly established IRA.  Then within 2 months, withdrew the total proceeds because it had lost money.  The two 1099R’s represent the same money, but now have a total of $41,000.  This was all done in the same calendar year.  She is a 50 year old teacher and appears to violated several rules, including rollover without the proper title, excess contibution to an IRA and having withholding taken out of the second distribution.  How do we report this double distribution and is there penalty relief from excess contribution?  These were two separate custodians.

Submitted by Alan - IRA critic on Sun, 2024-02-11 16:39

  • This will probably have to be taken up with the IRS via a substitute 1099R, as it is very unlikely that the second custodian will agree to issue a corrected 1099R as a removal of excess, even if provided with documentation that the prior distribution to a non spouse beneficiary that was not eligible for rollover should have been treated as a removal of an excess contribution. If that custodian refuses to correct the 1099R as expected, Plan B would be to request Form 4852, to be used as a substitute 2023 1099R (coded 81) and file it (see  Form 4852 Inst per link below). If the second total distribution exceeded the amount rolled into that IRA, any earnings should be shown in Box 2a and will be taxable. I doubt that Form 4852 completion and filing falls under VITA operations, but that’s probably the only way that this income will not be taxed twice. You may have to refer client to a paid preparer.
  • About Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. | Internal Revenue Service (irs.gov)
  • The first distribution 1099R should be reported as issued with the full amount taxable (assuming no inherited IRA basis). That 1099R should be coded 4, therefore no 10% penalty. 
  • There should be no excise taxes due since the 4852 substitute 1099R would indicate removal of the excess contribution to the second IRA. 

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