As I read this, I cannot seem to determine whether or not my client (age 40) with his IRA#1, can transfer his entire 100% or $10K of his IRA#1 to an already established IRA#2 by having the Trustee from IRA#1 issue a check to the client and the client within 60 days deposits the $10K into his IRA#2 and AVOIDS a premature distributions and the 10% penalty. I called a couple Retirement Depts at 2 different Mutual Funds and they both said yes my client can take the $10K in hand and avoid premature distribution and 10% penalty if the full 10K is deposited into another IRA within 60 days. This is NOT a rollover. From what I read, IRA#1 does not lawfully need to withold 20% from my clients $10K, correct?
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Why not a rollover?
At the risk of asking what may be a very dumb question: Why not just have IRA #1 send the funds directly to IRA #2 ??Originally posted by AZ-Tax View Post
(This assumes, of course, there are no issues with traditional/Roth IRAs, or Forms 8606 rattling around, or who knows what else related to the history of IRA #2.)
But it certainly sounds like a rollover to me. (And, of course, if it's not a rollover then the IRA #1 distribution is likely fully taxable with a penalty to boot!!)
The other fly in the ointment is #1 will issue a Form 1099-R, probably coded "1," whether there is or is not income tax withholding. This will generate a potential tax/penalty scenario, which can only be "repaired" at the time of tax filing. There have been many comments on these boards where such an option was properly used, and for a myriad of reasons (software/operator error/negligence ??) the IRS ignored same and later sent a CP2000 notice. OTOH, if #1 sends funds to #2, said Form 1099-R would show a "G" code and problem is solved immediately.
Whether there is mandatory withholding on a "distribution" is between client and holder of IRA #1. Of course, if there is, then the client has to "take the check" and then also find some loose cash to cover the withholding that occurred, and take both to IRA #2 in order to have rolled over everything (gross proceeds).
It's too late for my morning coffee, but again I just cannot follow the logic or reason for ever going this circuitous route in the first place. The only thing I can fathom is use of funds in a 0.5% short-term CD or perhaps a trip to Vegas.
Tell us more!
FE -
Client needs money for short period
Client needs money for short period of time. Says will be able to pay it back within 60 days. Makes pretty good salary. I actually I had another client come in during tax season who took a distribution and then paid back to his IRA within 60 days. Yes he received a 1099-R but on the worksheet it was just a box to mark if it was all rolled over. Maybe I am confused about rolled over. I was under the impression a roll over was when you rolled over a 401k or 403b into an IRA. Not a trustee to trustee transfer.Originally posted by FEDUKE404 View PostComment
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Distribution first, then perhaps a rollover
The way I've always understood things is you have only two choices: 1) Distribution or 2) Rollover.Originally posted by AZ-Tax View Post
If a direct rollover (code G), the client never touches the funds. Most people go this route. This would be reported on a Form 1099-R, Code G. I've had numerous clients who have used this method, for no other reason than moving their IRA from Investment Firm A to Investment Firm B. It is by far the simplest route, and eliminates the need for any "discussions" re income tax withholding.
If an actual distribution (that eventually changes into a qualifying rollover), it remains a distribution and must be accounted for as such. This would be reported on a Form 1099-R, Code 1 (likely). If, within the 60-day window, the funds are legitimately placed into a new account, the former distribution then becomes negated (and noted as such on Form 1040) to remove any taxable income.
As for marked "on the worksheet" that "it was all rolled over", that sounds like an internal tax software worksheet only. That would be used for the tax preparer to acknowledge/report that the DISTRIBUTED funds were in fact properly placed into a new account by the recipient. The tax software then automatically places the required information on the appropriate line, such as Form 1040 line 15. (With code "G" there is obviously no need for such separate data entry by the preparer. This assumes ALL information shown on the Form 1099-R is properly entered.
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I have heard of people with a short-term need for money, who use such a method to generate some funds. (Isn't there some limit as to how often you can do that????) The client needs to be fully aware of the rules related to the 60-day window. The IRS will not give an inch, and IIRC the clock starts on the date of the distribution (not necessarily the date the client receives the money) and the funds must actually be in place in the new account by the end of the time period. One day late turns the entire "rollover" into a fully taxable event.
Hope this helps.
FEComment
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See Pub. 590
Rollover From One IRA Into AnotherOriginally posted by AZ-Tax View Post
You can withdraw, tax free, all or part of the assets from
one traditional IRA if you reinvest them within 60 days in
the same or another traditional IRA. Because this is a rollover,
you cannot deduct the amount that you reinvest in
an IRA.
You may be able to treat a contribution made to
one type of IRA as having been made to a different
type of IRA. This is called recharacterizing the
contribution. See Recharacterizations in this chapter for
more information.
Waiting period between rollovers. Generally, if you
make a tax-free rollover of any part of a distribution from a
traditional IRA, you cannot, within a 1-year period, make a
tax-free rollover of any later distribution from that same
IRA. You also cannot make a tax-free rollover of any
amount distributed, within the same 1-year period, from
the IRA into which you made the tax-free rollover.
The 1-year period begins on the date you receive the
IRA distribution, not on the date you roll it over into an IRA.
Pub. 590 page 24,25 for exampleComment
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1. It is a rollover if he deposits 100% of the funds received into an IRA within 60 days.Originally posted by AZ-Tax View Post
2. I believe the mandatory withholding applies only to 401(k)-type withdrawals. Not IRA's. Make sure he fills out the paperwork appropriately. It may say if no election is made, they will withhold.Last edited by Burke; 09-16-2013, 10:14 AM.Comment
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Your description is a "transfer" not a "rollover"
A rollover is from an employer plan to an individual plan. A transfer is from like plan to like plan (401k to 401k, IRA to IRA). Yes, the individual can request a distribution from the first IRA, spend the money and then, within 60 days contribute the same amount to the second IRA and call it a transfer. Even if it is not the "same" funds. As long as the amount is the same and it occurs within 60 days. Be careful of how the 60 days is measured though.Comment
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See Gene V's post above quoting from Pub 590. Where the funds are received by the taxpayer, and moved from one IRA to another (or the same IRA) within 60 days, is a rollover. And therefore the rollover rules come into play. A direct transfer (where the TP does not receive the funds into his possession) does not come under the rollover rules.Comment
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