Client missed 60 day IRA Rollover Window

[kam]

Working with a couple in their upper 80's who cashed out an ~$100K IRA without understanding tax implications. They were also unaware of the 60 day rollover rule. When I started their taxes, I immediately contacted them/their financial advisor and found out they had reinvested in a non-qualified account at day 70 after withdrawal. I found two options to waive the 60 day rule: 1) Letter Ruling or 2) Self Certification Letter. I asked their financial advisor (who was apparently asleep at the switch) to sign the self certification letter but they refused. Are there any other options that would allow them to rollover the account to an IRA at this point? With Fed and State taxes combined, it is about a $15K tax hit. Thanks

[rbynaker]

Unless there was a disaster provision available, I think they're stuck with the tax. But paying $15K tax on a $100K IRA is not a bad deal. Especially since you said Fed + State! Most taxpayers would love to only have a 15% tax rate. If invested in securities that generate QD/LTCG this may be a better deal anyway since low income folks pay 0% income tax on those earnings going forward. In contrast, if they were still in the IRA the earnings would be subject to ordinary income tax rates.

[FEDUKE404]

So where was the money up to Day 70? If it was (perhaps) their intent to perform a rollover, why wait so long to do so?
When did the idea of any rollover first occur? If early in the game, a direct institution-to-institution transfer would have solved a LOT of problems.
While there may be "blame" to go around, I think it is likely they are stuck with the tax on the $100k withdrawal. The IRS is pretty strict on the 60-day issue, which IIRC starts on the date of the withdrawal which likely precedes the check issuance / receipt date.
Not knowing any other income numbers, your client might find more Soc Sec is taxed due to the higher income. Hope they don't get IRMAA'ed !

[kam]

This is an elderly couple who didn't really understand what they were doing. It was over early Christmas time that they received the IRA disbursement and just stuck it in the bank for 60 days or so. Then they eventually talked to their financial advisor (should have called me also but didn't) and just put the funds in a non-qualified acct (not sure why). When I got involved, I immediately contacted them to inform of the tax consequences. I thought the financial advisor should just sign the self-certification under the "deposited money in an acct client mistakenly thought was a qualified acct" but they wouldn't. Any other ideas? BTW, I had typo, impact was $25K on their taxes.

[FEDUKE404]

This is an elderly couple who didn't really understand what they were doing. It was over early Christmas time that they received the IRA disbursement and just stuck it in the bank for 60 days or so. Then they eventually talked to their financial advisor (should have called me also but didn't) and just put the funds in a non-qualified acct (not sure why). When I got involved, I immediately contacted them to inform of the tax consequences. I thought the financial advisor should just sign the self-certification under the "deposited money in an acct client mistakenly thought was a qualified acct" but they wouldn't. Any other ideas? BTW, I had typo, impact was $25K on their taxes.

I feel their pain, but you're going to have a difficult time having an investment advisor sign something along the lines of "mistakenly thought it was a qualified plan."
Some more client consideration and/or due diligence might have prevented this mess.
If your clients feel they were wronged, they can always pursue arbitration and/or a civil suit. But that's a large obstacle to overcome. It would be unlikely that they would prevail.

[Lion]

https://www.irs.gov/retirement-plans/accepting-late-rollover-contributions

[DoubleO]

While I have had issues with FAs in the past, I believe the FA is holding the correct position. Assuming the TPs told the FA the original monies came from an IRA, the 60 day window had already passed, and none of the exceptions in the Rev Proc or model letter seem to fit. Note it is a self-certification letter the financial institution can use to ACCEPT a late rollover, meaning the TPs certify, not the FA. Why would the FA sign? In addition, it sounds as if the FA did what s/he was asked to do: invest the money in something.

It does not sound as if the FA mistakenly put it into a wrong type of account.

I’m sure the monies came directly from TPs’ bank account, so unless the TPs said they wanted to do a rollover or indicated it was from an IRA, the FA may not have even known. It was up to the TPs to get guidance if they wanted guidance before taking the distribution.

You are wanting the FA to attest to something that didn’t happen. Unless TPs can show they specifically talked with the FA in the 60-day window to rollover the money and unforeseen circumstances prevented it from happening, I think any other attestation would be fraudulent per the details in your post. I don’t think “I was too busy at Christmas” qualifies.

That said, perhaps it is cheaper for the TPs to pay the tax now rather than later.

[kam]

Thank you to all who responded. I suspected they would end up paying the taxes, but was hoping I was missing something.

[Rapid Robert]

"This is an elderly couple who didn't really understand what they were doing."

You keep on saying this. If true, it seems like they should delegate a power of attorney to someone who does understand. With limited understanding, are they actually complaining about paying the tax? After all it needs to be paid sooner or later, now is probably a pretty good time, as post #2 states.

[DoubleO]

I just noticed that none of us in this thread pointed out that the RMD could not be rolled over anyway. Putting it out there for future reference. The posts do not state whether the RMD was taken before the $100,000 distribution or not.