IRA Rollovers & Violating The 12 Month Rule


A

A.G. Kalman

I need confirmation that I am interpreting the rules and
process for rollovers (not trustee to trustee transfers)
from a traditional IRA to another traditional IRA.

An elderly couple both in their late 60s removed the wife's
funds from Bank A IRA in Dec. 2003, and deposited them into
Bank B IRA in the same month. The funds in Bank B IRA were
invested in a 6 month time deposit. When the CD matured in
June 2004 they removed the funds and deposited them the same
day into Bank C IRA who was offering a better rate. The
customer representative in Bank C told them it was okay
because the first rollover had occurred in 2003 and this
rollover was occurring in 2004. Their income is normally
below the filing threshold. However, the amount of the Dec.
2003 distribution was considerable and was coded as a normal
distribution.

They had not filed a tax return for 2003. I informed them
that the 2003 distribution needed to be accounted for on a
tax return as a nontaxable rollover and I would prepare the
return. (I bet all you Californians are saying "They
probably got a notice from the CA FTB asking why they hadn't
filed! You're right!) I then informed them that the
distribution in June 2004 violated the 12 month rollover
rule and is fully taxable in 2004 as a normal IRA
distribution. I also informed them that the amount that was
now sitting in Bank C IRA was an excess contribution and
unless they removed it with the earnings, it would be
subject to the annual 6% excise tax.

Did I get this right?

I also don't believe that there is any way to retroactively
change the tax situation. I'm thinking that their only
recourse is to try to get Bank C to make them whole or to
take Bank C to court as they relied upon the erroneous
advice of the bank's representative.
 
Ad

Advertisements

P

Phil Marti

A.G. Kalman said:
I need confirmation that I am interpreting the rules and
process for rollovers (not trustee to trustee transfers)
from a traditional IRA to another traditional IRA.

An elderly couple both in their late 60s removed the wife's
funds from Bank A IRA in Dec. 2003, and deposited them into
Bank B IRA in the same month. The funds in Bank B IRA were
invested in a 6 month time deposit. When the CD matured in
June 2004 they removed the funds and deposited them the same
day into Bank C IRA who was offering a better rate. The
customer representative in Bank C told them it was okay
because the first rollover had occurred in 2003 and this
rollover was occurring in 2004. Their income is normally
below the filing threshold. However, the amount of the Dec.
2003 distribution was considerable and was coded as a normal
distribution.

They had not filed a tax return for 2003. I informed them
that the 2003 distribution needed to be accounted for on a
tax return as a nontaxable rollover and I would prepare the
return. (I bet all you Californians are saying "They
probably got a notice from the CA FTB asking why they hadn't
filed! You're right!) I then informed them that the
distribution in June 2004 violated the 12 month rollover
rule and is fully taxable in 2004 as a normal IRA
distribution. I also informed them that the amount that was
now sitting in Bank C IRA was an excess contribution and
unless they removed it with the earnings, it would be
subject to the annual 6% excise tax.

Did I get this right?
Yes

I also don't believe that there is any way to retroactively
change the tax situation. I'm thinking that their only
recourse is to try to get Bank C to make them whole or to
take Bank C to court as they relied upon the erroneous
advice of the bank's representative.
Good luck. There are two reasons for the fine print
"consult your tax advisor" stuff that's in any IRA
agreement. One is that they know squat about taxes. The
other is liability prophylaxis.
 
B

Barry Picker

A.G. Kalman said:
I need confirmation that I am interpreting the rules and
process for rollovers (not trustee to trustee transfers)
from a traditional IRA to another traditional IRA.

An elderly couple both in their late 60s removed the wife's
funds from Bank A IRA in Dec. 2003, and deposited them into
Bank B IRA in the same month. The funds in Bank B IRA were
invested in a 6 month time deposit. When the CD matured in
June 2004 they removed the funds and deposited them the same
day into Bank C IRA who was offering a better rate. The
customer representative in Bank C told them it was okay
because the first rollover had occurred in 2003 and this
rollover was occurring in 2004. Their income is normally
below the filing threshold. However, the amount of the Dec.
2003 distribution was considerable and was coded as a normal
distribution.

They had not filed a tax return for 2003. I informed them
that the 2003 distribution needed to be accounted for on a
tax return as a nontaxable rollover and I would prepare the
return. (I bet all you Californians are saying "They
probably got a notice from the CA FTB asking why they hadn't
filed! You're right!) I then informed them that the
distribution in June 2004 violated the 12 month rollover
rule and is fully taxable in 2004 as a normal IRA
distribution. I also informed them that the amount that was
now sitting in Bank C IRA was an excess contribution and
unless they removed it with the earnings, it would be
subject to the annual 6% excise tax.

Did I get this right?

I also don't believe that there is any way to retroactively
change the tax situation. I'm thinking that their only
recourse is to try to get Bank C to make them whole or to
take Bank C to court as they relied upon the erroneous
advice of the bank's representative.
You got it right. They blew their IRA. Good luck going
after the bank, however. They will surely hide behind their
"we don't give tax advice" disclaimer.

Barry Picker, CPA/PFS, CFP
 
H

Harlan Lunsford

A.G. Kalman said:
I need confirmation that I am interpreting the rules and
process for rollovers (not trustee to trustee transfers)
from a traditional IRA to another traditional IRA.

An elderly couple both in their late 60s removed the wife's
funds from Bank A IRA in Dec. 2003, and deposited them into
Bank B IRA in the same month. The funds in Bank B IRA were
invested in a 6 month time deposit. When the CD matured in
June 2004 they removed the funds and deposited them the same
day into Bank C IRA who was offering a better rate. The
customer representative in Bank C told them it was okay
because the first rollover had occurred in 2003 and this
rollover was occurring in 2004. Their income is normally
below the filing threshold. However, the amount of the Dec.
2003 distribution was considerable and was coded as a normal
distribution.

They had not filed a tax return for 2003. I informed them
that the 2003 distribution needed to be accounted for on a
tax return as a nontaxable rollover and I would prepare the
return. (I bet all you Californians are saying "They
probably got a notice from the CA FTB asking why they hadn't
filed! You're right!) I then informed them that the
distribution in June 2004 violated the 12 month rollover
rule and is fully taxable in 2004 as a normal IRA
distribution. I also informed them that the amount that was
now sitting in Bank C IRA was an excess contribution and
unless they removed it with the earnings, it would be
subject to the annual 6% excise tax.

Did I get this right?
Right on the button, Alan. And the 6% if not withdrawn by
due date of return.
I also don't believe that there is any way to retroactively
change the tax situation. I'm thinking that their only
recourse is to try to get Bank C to make them whole or to
take Bank C to court as they relied upon the erroneous
advice of the bank's representative.
Suing the bank is a long shot, don't you think? And how
could Bank C "make them whole"? by paying "their" tax?

When presenting a case to Bank C however, point out that the
rule is not a second distribution in the NEXT year, but a
full 12 months AFTER the first.

ChEAr$,
Harlan Lunsford, EA n LA
 
D

David Woods, EA, ChFC, CLU

A.G. Kalman said:
I need confirmation that I am interpreting the rules and
process for rollovers (not trustee to trustee transfers)
from a traditional IRA to another traditional IRA.

An elderly couple both in their late 60s removed the wife's
funds from Bank A IRA in Dec. 2003, and deposited them into
Bank B IRA in the same month. The funds in Bank B IRA were
invested in a 6 month time deposit. When the CD matured in
June 2004 they removed the funds and deposited them the same
day into Bank C IRA who was offering a better rate. The
customer representative in Bank C told them it was okay
because the first rollover had occurred in 2003 and this
rollover was occurring in 2004. Their income is normally
below the filing threshold. However, the amount of the Dec.
2003 distribution was considerable and was coded as a normal
distribution.

They had not filed a tax return for 2003. I informed them
that the 2003 distribution needed to be accounted for on a
tax return as a nontaxable rollover and I would prepare the
return. (I bet all you Californians are saying "They
probably got a notice from the CA FTB asking why they hadn't
filed! You're right!) I then informed them that the
distribution in June 2004 violated the 12 month rollover
rule and is fully taxable in 2004 as a normal IRA
distribution. I also informed them that the amount that was
now sitting in Bank C IRA was an excess contribution and
unless they removed it with the earnings, it would be
subject to the annual 6% excise tax.

Did I get this right?

I also don't believe that there is any way to retroactively
change the tax situation. I'm thinking that their only
recourse is to try to get Bank C to make them whole or to
take Bank C to court as they relied upon the erroneous
advice of the bank's representative.
Well I think your application of the law is correct. The
only possibility I see other than the ones you pointed out,
is look for any authority on exceptions to the 12 month
rule. There is authority for exception to the 60 day rule
for reasonable cause, maybe there is something on the 12
month rule.
 
Ad

Advertisements

A

A.G. Kalman

Well I think your application of the law is correct. The
only possibility I see other than the ones you pointed out,
is look for any authority on exceptions to the 12 month
rule. There is authority for exception to the 60 day rule
for reasonable cause, maybe there is something on the 12
month rule.
Nada! I searched.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads


Top