Need Clarification of 12 Month IRA Rollover Rule


A

A.G. Kalman

IRC Sec 408(d)(3)(B) is where one finds the rule that limits
IRA to IRA tax-free rollovers to only one during any 12
month period. Any distribution from the IRA account from
which the funds were withdrawn or any distribution from the
IRA into which the funds were rolled would be a taxable
distribution. There is an exception to this rule which is
not relevant to my query.

Assume for this purpose that the taxpayer has no cost basis
in the IRA account and also has no earned income for the
year.

Let's say that someone who is ignorant of this rule violates
it and makes two trustee to trustee rollovers in the 12
month period (IRA A to IRA B and IRA B to IRA C). The
distribution from A to B is tax-free. The distribution from
B, I believe is taxable for both the rolled over amount and
any earnings.

My question is what is the status of the funds that now sit
in IRA C? If the distribution from B was taxable, are these
funds

1. An excees contribution subject to 6% tax or
2. An IRA with a cost basis equal to the taxable income or
3. An IRA with no cost basis and therefore subject to being
taxed again upon distribution?

And.... what if they roll over the balance from IRA C
(deposit plus earnings) to IRA D, also within the same 12
month period. Is this taxable and how much is taxable?

The above is not theoretical. I have just become aware of
an individual who is doing just this by shopping for
interest rates.

Alan
http://taxtopics.net
 
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E

Ed Zollars, CPA

A.G. Kalman said:
Let's say that someone who is ignorant of this rule violates
it and makes two trustee to trustee rollovers in the 12
month period (IRA A to IRA B and IRA B to IRA C).
If it's a trustee to trustee transfer, there's not a
problem. See Revenue Ruling 78-406. The issue is that
§408(d)(3)(A) and (B) only apply to transactions that result
in a distribution to the *individual* while a trustee to
trustee transfer avoids that problem. That's also the
reason why you can do a trustee to trustee transfer of an
*inherited* IRA even though you cannot roll over
distributions from the inherited account.

But, for the moment assuming we have a case where the
taxpayer did take the check each time I'll go on...
The distribution from A to B is tax-free. The distribution
from B, I believe is taxable for both the rolled over
amount and any earnings.

My question is what is the status of the funds that now sit
in IRA C?
It would seem to be an excess contribution, at least to the
extent that the taxpayer didn't have any contribution space
"left over" for the year in question. That overcontribution
would be subject to the excise tax each year it remained in
the account until it was fully absorbed or removed from the
account.
 
C

Charlie48K

A.G. Kalman said:
IRC Sec 408(d)(3)(B) is where one finds the rule that limits
IRA to IRA tax-free rollovers to only one during any 12
month period. Any distribution from the IRA account from
which the funds were withdrawn or any distribution from the
IRA into which the funds were rolled would be a taxable
distribution. There is an exception to this rule which is
not relevant to my query.

Assume for this purpose that the taxpayer has no cost basis
in the IRA account and also has no earned income for the
year.

Let's say that someone who is ignorant of this rule violates
it and makes two trustee to trustee rollovers in the 12
month period (IRA A to IRA B and IRA B to IRA C). The
distribution from A to B is tax-free. The distribution from
B, I believe is taxable for both the rolled over amount and
any earnings.

My question is what is the status of the funds that now sit
in IRA C? If the distribution from B was taxable, are these
funds

1. An excees contribution subject to 6% tax or
2. An IRA with a cost basis equal to the taxable income or
3. An IRA with no cost basis and therefore subject to being
taxed again upon distribution?

And.... what if they roll over the balance from IRA C
(deposit plus earnings) to IRA D, also within the same 12
month period. Is this taxable and how much is taxable?

The above is not theoretical. I have just become aware of
an individual who is doing just this by shopping for
interest rates.
There is no limitation on trustee to trustee transfers. (You
can't have a trustee to trustee rollover. By definition, a
rollover goes through the taxpayer.) The limitation occurs
when the funds pass through the owner. If you mean that
they're rollovers, then they're excess contributions subject
to the 6% tax.
 
J

JayBee

Let's say that someone who is ignorant of this rule violates
it and makes two trustee to trustee rollovers in the 12
month period (IRA A to IRA B and IRA B to IRA C). The
distribution from A to B is tax-free. The distribution from
B, I believe is taxable for both the rolled over amount and
any earnings.
A trustee-to-trustee transfer isn't a rollover, since the
funds are not transferred to the IRA owner/participant and
are not within his or her direct control or use. The twelve
month rule applies only if the distribution is made to the
participant, who then transfers the distribution to another
IRA.

Joel Berry, CPA
Sugar Land, Texas
 
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R

Richard B. Gardner

A.G. Kalman said:
Let's say that someone who is ignorant of this rule violates
it and makes two trustee to trustee rollovers in the 12
month period (IRA A to IRA B and IRA B to IRA C). The
distribution from A to B is tax-free. The distribution from
B, I believe is taxable for both the rolled over amount and
any earnings.

My question is what is the status of the funds that now sit
in IRA C?
The once-per-year rule is applied separately to each IRA.
Prop. Reg.§1.408-4(4)(ii) [Amended] states:

(ii) For taxable years beginning after December 31, 1977,
paragraph (b)(1) of this section does not apply to any
amount received by an individual from an individual
retirement account, individual retirement annuity or
retirement bond if at any time during the 1-year period
ending on the day of receipt, the individual received any
other amount from the individual retirement account,
individual retirement annuity or retirement bond which was
not includible in his gross income because of the
application of paragraph (b)(1) of this section. This rule
applies to each separate individual retirement account,
individual retirement annuity, or retirement bond maintained
by an individual. Thus, if an individual maintains two
individual retirement accounts, IRA-1 and IRA-2, and rolls
over the assets of IRA-1 into IRA-3, he is not precluded by
this subdivision from making a tax-free rollover from IRA-2
to IRA-3 or any other IRA within one year after the rollover
from IRA-1 to IRA-3.
 

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