IRA rollover problem. Please help

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Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Fri Apr 30, 2021 12:04 pm Just talked to a tax attorney but he was not specialized in IRAs but he said this about Roth IRA.

Even though i try to convert 2nd check of 340k to roth ira from traditional , i would not be able to do that due to income limitations. But he was not positive.
Agree, he does not specialize in IRAs! 2009 was the last year where there were Roth conversion income limits.

If Ally is going to insist that 340k is the excess amount, which is arguable, they certainly are not going to process a conversion of that amount.

By the way, I don't think you answered my questions of a couple days back. Were the ML checks deposited directly to the Ally IRA, or were they first deposited into your checking account? What transactions related to this does your checking statement show?
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Wed Apr 28, 2021 9:49 pm
RubyTuesday wrote: Wed Apr 28, 2021 8:22 pm Could BOTH contributions be distributed as excess contributions?

And then either the larger one be “re-deposited” into tIRA and the smaller one converted to Roth, or
The larger one rolled into 401(k)?
I am not sure

What is tIRA by the way?
No. Unless you are going to state that BOTH of these are excess contributions, which cannot be the case. With 2 distributions reported by ML (2 different 1099R forms next January), only 1 of these rollovers would be an excess contribution.

Further, while Mark makes a valid point, none of this works unless Ally cooperates by honoring a request to treat the 40k rollover amount as an excess contribution due to violation of the one rollover limit, which Ally should have caught in the first place. Compliance with the one rollover limit is normally handled at the custodian level, since the IRS often does not have the data to identify violations. In this case the IRS would know since there will be 2 1099R forms. Since custodians do not act uniformly in enforcing these rules, the taxpayer is at their mercy when trying to resolve a mess such as this one.

TIRA is short for a traditional IRA.
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celia
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Re: IRA rollover problem. Please help

Post by celia »

Alan S. wrote: Fri Apr 30, 2021 12:38 pm
Econberkeley wrote: Wed Apr 28, 2021 9:49 pm
RubyTuesday wrote: Wed Apr 28, 2021 8:22 pm Could BOTH contributions be distributed as excess contributions?

And then either the larger one be “re-deposited” into tIRA and the smaller one converted to Roth, or
The larger one rolled into 401(k)?
No. Unless you are going to state that BOTH of these are excess contributions, which cannot be the case. With 2 distributions reported by ML (2 different 1099R forms next January), only 1 of these rollovers would be an excess contribution.
Hmmm. . . Maybe there's a loophole here. BOTH of these could be excess contributions, if another indirect rollover was done within the previous 365 days (even at another custodian, which Ally would not know about) . . . And if the 2 interest checks that came a few days later were moved to the IRA, they would also be excess contributions. Econ, did those 2 interest checks ever get removed from the checking account?
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celia
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Re: IRA rollover problem. Please help

Post by celia »

Econberkeley wrote: Thu Apr 29, 2021 8:39 pm What I am wondering is an analyst working in the back office can make decision on behalf of me? In my case this person decided to deposit the small amount check first and then the big check as 2nd deposit. Depositing 2 checks in the same Traditional IRA plan in the same year was a violation on its own but then the deposit sequence should not be up to someone working there.
You may be too generous as I think it is a problem in the mail/data entry room and the procedures Ally has/doesn't have in place**. That may be why things are taking so long. Since this is your strongest argument (that you should have been notified of the error before any deposits were made, and that it was not their decision to make), I would just wait for them to resolve it. The IRS doesn't penalize you for custodians losing stuff or taking too long.


Think about other people who have made this error and don't even know it was an error. How is it even supposed to be caught? It seems like the IRS wants every IRA account holder to know every rule having to do with rollovers. (In fairness, the vast majority of rollovers are trustee-to-trustee transfers to avoid problems like this and the transfer not being completed in 60 days.)

So, don't feel bad about this. It seems the IRS has to acknowledge that this may not be intentional. And they do give exceptions to penalties when you find an error early and correct it as soon as you can.

My question to others here is how should this situation even be caught? Does your tax software ask and look for more than one indirect rollover within the last 365 days? And what Form 1099-R Distributions Codes would be shown (there isn't one for "indirect rollover" and since the check was made out to the taxpayer, it would be an (1) Early Distribution or (7) Normal Distribution depending on the taxpayer's age). It doesn't seem like the custodians would be responsible(** contradicts above) since you could do an indirect rollover from Custodian A to B and an indirect rollover from Custodian Y to Z in the same year. So taxpayers who do that probably just go about their merry way.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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celia
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Re: IRA rollover problem. Please help

Post by celia »

Econberkeley, Assuming the two deposits (and their growth/loss) are the only money in the IRA (ie, you started a new IRA and didn't make new contributions or roll the "interest" checks into the IRA), here's what I would do: Calculate the exact percentage that the small check was compared to the entire deposit.

$40K / ($40K + $342AK) = 10.471% (approximately)

If you removed the smaller rollover contribution, that means 10.471% of the entire value of the IRA on the day the money is moved out should be removed. This holds even if the two rollovers were invested differently. It might "feel" like some of the $40K is being left behind or some of the $342K is being removed, but the IRS looks at all the money in the account as being co-mingled.

I would then fight for that percentage to be "removed as an excess contribution" and be converted instead. If Ally won't do that, then I would wait a month and convert that percentage myself (maybe even that percentage of each holding since multiple holdings can move up and down independently from each other and I would not know the closing values until after the markets close). That would show my good-faith effort to fix this the best I can. Soon after, I would do a second Roth conversion of a few thousand just in case the calculation or amount "removed" wasn't accurate. Of course, I would be keeping records of each phone call, what I requested, and what their response was. When this is completed, I would then write a short explanation for my records and for the IRS so I could add it to my 2021 return.

What do others think?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Fri Apr 30, 2021 12:13 pm
Econberkeley wrote: Fri Apr 30, 2021 12:04 pm Just talked to a tax attorney but he was not specialized in IRAs but he said this about Roth IRA.

Even though i try to convert 2nd check of 340k to roth ira from traditional , i would not be able to do that due to income limitations. But he was not positive.
Agree, he does not specialize in IRAs! 2009 was the last year where there were Roth conversion income limits.

If Ally is going to insist that 340k is the excess amount, which is arguable, they certainly are not going to process a conversion of that amount.

By the way, I don't think you answered my questions of a couple days back. Were the ML checks deposited directly to the Ally IRA, or were they first deposited into your checking account? What transactions related to this does your checking statement show?
Sorry I must have missed it

Both checks came from ML to my home with mail. Then I sent to Ally and both checks are deposited into Traditional IRA savings account. They are still there. They were never in checking account. Always in Traditional IRA account in Ally from the beginning.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

celia wrote: Fri Apr 30, 2021 5:37 pm
Alan S. wrote: Fri Apr 30, 2021 12:38 pm
Econberkeley wrote: Wed Apr 28, 2021 9:49 pm
RubyTuesday wrote: Wed Apr 28, 2021 8:22 pm Could BOTH contributions be distributed as excess contributions?

And then either the larger one be “re-deposited” into tIRA and the smaller one converted to Roth, or
The larger one rolled into 401(k)?
No. Unless you are going to state that BOTH of these are excess contributions, which cannot be the case. With 2 distributions reported by ML (2 different 1099R forms next January), only 1 of these rollovers would be an excess contribution.
Hmmm. . . Maybe there's a loophole here. BOTH of these could be excess contributions, if another indirect rollover was done within the previous 365 days (even at another custodian, which Ally would not know about) . . . And if the 2 interest checks that came a few days later were moved to the IRA, they would also be excess contributions. Econ, did those 2 interest checks ever get removed from the checking account?
They were never in the checking account. Ally deposited them to Traditional IRA account as I requested at the beginning.
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

OK, the answer eliminates a possible work around to Ally's decision to consider the small check as the permitted rollover, making the large check an excess contribution. Even if the ML checks were deposited and commingled in a checking account does not mean that Ally would change their position.

As for where to go from here, the 60 day rollover period ends within a week. More specifically, 60 days from the day you received the ML checks in your mailbox. If you do not know the exact date you received them, give yourself the benefit of the doubt and use 4 business days from the date your ML statement shows as the distribution date from their IRA.

While you have plenty of time to deal with Ally to try to get them to process an excess contribution distribution of the small check as the deposit that you are electing to treat as the excess amount, you have little time to fund a Roth conversion by the end of the 60 day rollover period.

WARNING: Worst case scenario. You convert 40 k using your other available money, and Ally refuses to treat the 40 k rollover as your excess (disallowed second distribution rollover) and forces you to treat the 340k (or whatever exact amount of the large check) as the excess. You would then have taxable income of 340k plus earnings on the 340k (the conversion is reported as part of the 340k) all in 2021. So if the earnings were 1k, that's 341k of taxable income, with 301 k of it subject to 10% penalty.

However, if you send Ally an urgent letter advising them that you will be reporting the 40k as the excess contribution and that the 340k is not to be distributed, and you will be reporting it as a valid rollover on your return, the damages will be limited to the 40k conversion that you did not plan. It is not clear what position the IRS will take on this, but this is your only chance other than expensive (20k) PLR that will take a couple years to resolve and may well not go your way.

So given the dire alternative, you should probably proceed as above, and do the conversion with other money if you have it. Open a Roth IRA in your nearest brokerage house if you choose to eliminate Ally from this portion of the transaction, and give them a check earmarked as a conversion contribution.

Again, this all might work - or it might not.
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

Econberkeley wrote: Sat May 01, 2021 6:30 pm Both checks came from ML to my home with mail. Then I sent to Ally and both checks are deposited into Traditional IRA savings account. They are still there. They were never in checking account. Always in Traditional IRA account in Ally from the beginning.
Try telling Ally that you first received the 340k check and then received the 40k check, and then sent them to Ally in the same envelope. From my reading, the order that the checks were cashed/deposited by Ally has no bearing on which was the "valid" rollover.

That's because the 365 day clock starts on the day you receive a distribution that ends up being rolled over - NOT when the rollover occurs. Eg. you could receive a check on day 1, then another check on day 2, then on day 3 you deposit the day 2 check, and finally on day 59 you deposit the day 1 check. IMO this makes the day 2 check the "failed" rollover even though it was the first one deposited, and the day 1 check (the 340k one) the valid rollover since it was first distribution received.

This frees the 40k to be marked as the excess contribution and moved to a Roth for a completed Roth conversion.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Sat May 01, 2021 9:10 pm OK, the answer eliminates a possible work around to Ally's decision to consider the small check as the permitted rollover, making the large check an excess contribution. Even if the ML checks were deposited and commingled in a checking account does not mean that Ally would change their position.

As for where to go from here, the 60 day rollover period ends within a week. More specifically, 60 days from the day you received the ML checks in your mailbox. If you do not know the exact date you received them, give yourself the benefit of the doubt and use 4 business days from the date your ML statement shows as the distribution date from their IRA.

While you have plenty of time to deal with Ally to try to get them to process an excess contribution distribution of the small check as the deposit that you are electing to treat as the excess amount, you have little time to fund a Roth conversion by the end of the 60 day rollover period.

WARNING: Worst case scenario. You convert 40 k using your other available money, and Ally refuses to treat the 40 k rollover as your excess (disallowed second distribution rollover) and forces you to treat the 340k (or whatever exact amount of the large check) as the excess. You would then have taxable income of 340k plus earnings on the 340k (the conversion is reported as part of the 340k) all in 2021. So if the earnings were 1k, that's 341k of taxable income, with 301 k of it subject to 10% penalty.
why is the penalty based on 301k, I thought it should be based on 340K?
Alan S. wrote: Sat May 01, 2021 9:10 pmHowever, if you send Ally an urgent letter advising them that you will be reporting the 40k as the excess contribution and that the 340k is not to be distributed, and you will be reporting it as a valid rollover on your return, the damages will be limited to the 40k conversion that you did not plan. It is not clear what position the IRS will take on this, but this is your only chance other than expensive (20k) PLR that will take a couple years to resolve and may well not go your way.

So given the dire alternative, you should probably proceed as above, and do the conversion with other money if you have it. Open a Roth IRA in your nearest brokerage house if you choose to eliminate Ally from this portion of the transaction, and give them a check earmarked as a conversion contribution.

Again, this all might work - or it might not.
Why do I have little time for Roth Conversion? Does it always take too much time?

Also what is PLR?
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Sun May 02, 2021 1:03 am
Alan S. wrote: Sat May 01, 2021 9:10 pm OK, the answer eliminates a possible work around to Ally's decision to consider the small check as the permitted rollover, making the large check an excess contribution. Even if the ML checks were deposited and commingled in a checking account does not mean that Ally would change their position.

As for where to go from here, the 60 day rollover period ends within a week. More specifically, 60 days from the day you received the ML checks in your mailbox. If you do not know the exact date you received them, give yourself the benefit of the doubt and use 4 business days from the date your ML statement shows as the distribution date from their IRA.

While you have plenty of time to deal with Ally to try to get them to process an excess contribution distribution of the small check as the deposit that you are electing to treat as the excess amount, you have little time to fund a Roth conversion by the end of the 60 day rollover period.

WARNING: Worst case scenario. You convert 40 k using your other available money, and Ally refuses to treat the 40 k rollover as your excess (disallowed second distribution rollover) and forces you to treat the 340k (or whatever exact amount of the large check) as the excess. You would then have taxable income of 340k plus earnings on the 340k (the conversion is reported as part of the 340k) all in 2021. So if the earnings were 1k, that's 341k of taxable income, with 301 k of it subject to 10% penalty.
why is the penalty based on 301k, I thought it should be based on 340K?
Alan S. wrote: Sat May 01, 2021 9:10 pmHowever, if you send Ally an urgent letter advising them that you will be reporting the 40k as the excess contribution and that the 340k is not to be distributed, and you will be reporting it as a valid rollover on your return, the damages will be limited to the 40k conversion that you did not plan. It is not clear what position the IRS will take on this, but this is your only chance other than expensive (20k) PLR that will take a couple years to resolve and may well not go your way.

So given the dire alternative, you should probably proceed as above, and do the conversion with other money if you have it. Open a Roth IRA in your nearest brokerage house if you choose to eliminate Ally from this portion of the transaction, and give them a check earmarked as a conversion contribution.

Again, this all might work - or it might not.
Why do I have little time for Roth Conversion? Does it always take too much time?

Also what is PLR?
The Roth conversion is a rollover of the ML distribution, so is subject to the 60 day time limit from the date you received the checks from ML. In effect, you are endeavoring to have the large check treated as your allowed rollover, and the small check the disallowed one that must be returned. The conversion is an allowed rollover because conversions are exempt from the one rollover rule. So you convert the small check (probably having to use other funds because there is no way Ally would be able to process a corrective distribution to free up the 40k being removed from their IRA) to beat the 60 day deadline, and you get the returned 40k from the Ally IRA (with any earnings) to reimburse yourself for using other money to get the conversion done in time. You have time to battle with Ally to have them treat the 340k as the allowed rollover and the 40 as the excess amount.

PLR = Private Letter Ruling.
A tax attorney experienced with applying for PLRs with the IRS applies on your behalf to treat the 40k rollover as the excess amount. Since these cost roughly 20k including legal fees and can take many months to resolve, you would only consider this if you cannot convince Ally to treat the 40k as the excess contribution and issue proper 1099R for you to report this on your 2021 taxes.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

gobel wrote: Sun May 02, 2021 12:57 am
Econberkeley wrote: Sat May 01, 2021 6:30 pm Both checks came from ML to my home with mail. Then I sent to Ally and both checks are deposited into Traditional IRA savings account. They are still there. They were never in checking account. Always in Traditional IRA account in Ally from the beginning.
Try telling Ally that you first received the 340k check and then received the 40k check, and then sent them to Ally in the same envelope. From my reading, the order that the checks were cashed/deposited by Ally has no bearing on which was the "valid" rollover.

That's because the 365 day clock starts on the day you receive a distribution that ends up being rolled over - NOT when the rollover occurs. Eg. you could receive a check on day 1, then another check on day 2, then on day 3 you deposit the day 2 check, and finally on day 59 you deposit the day 1 check. IMO this makes the day 2 check the "failed" rollover even though it was the first one deposited, and the day 1 check (the 340k one) the valid rollover since it was first distribution received.

This frees the 40k to be marked as the excess contribution and moved to a Roth for a completed Roth conversion.
Interesting information here. I am not sure why the lady who called me from Ally insisted that the first deposited matters and she said $40K was deposited first but then she was not too knowleadgeable. She was not able to asnwer some of my questions.

If you are right and if I can convince Ally, that will be great. Tomorrow Monday is my D-day.

Oh by the way, I checked the picture of checks. The date on the checks are March 15 not March 5 as I previously stated. So I have time.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

gobel wrote: Sun May 02, 2021 12:57 am
Econberkeley wrote: Sat May 01, 2021 6:30 pm Both checks came from ML to my home with mail. Then I sent to Ally and both checks are deposited into Traditional IRA savings account. They are still there. They were never in checking account. Always in Traditional IRA account in Ally from the beginning.
Try telling Ally that you first received the 340k check and then received the 40k check, and then sent them to Ally in the same envelope. From my reading, the order that the checks were cashed/deposited by Ally has no bearing on which was the "valid" rollover.

That's because the 365 day clock starts on the day you receive a distribution that ends up being rolled over - NOT when the rollover occurs. Eg. you could receive a check on day 1, then another check on day 2, then on day 3 you deposit the day 2 check, and finally on day 59 you deposit the day 1 check. IMO this makes the day 2 check the "failed" rollover even though it was the first one deposited, and the day 1 check (the 340k one) the valid rollover since it was first distribution received.

This frees the 40k to be marked as the excess contribution and moved to a Roth for a completed Roth conversion.
Is there a link or a legal document or irs publication where it says "it does not matter when check is deposited first or second it does matter which check is sent first".?
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

TBH I am extrapolating that interpretation from the way I read the text of the Rev Code. However, I was just about to post about a site that I came across that seems to specialize in problems like this one. It has hundreds of posts about rollovers and indirect rollovers and the 365 day rule, eg. searching on "indirect" gives https://www.irahelp.com/search/ft/indirect (includes their blog entries and mailbag questions and forum threads).

I think some people here even post over there so I don't know why they didn't recommend it immediately. Maybe you still have time to post a question or contact them directly for help - they have an 800 number. And look at their Oct 2017 newsletter preview https://www.irahelp.com/content/october-2017 which is all about the 365 day rule. You have to subscribe to read it, but the front page lists topics like:

- Defining a Year
- Multiple Distributions from Different IRAs on the Same Day
- Roth IRA Conversion Fix - Only if Caught Within 60 Days
- Rollover to an Employer Plan Fix - Only if Caught Within 60 Days

ie. everything you have questions about. Here's their blog post that probably covers the first item and seems to support what I said about counting the day you received each check, not when they were deposited: https://www.irahelp.com/slottreport/wha ... a-rollover , read down to the 4th paragraph.

Here's the actual Sec. 408(d)(3)(B) that I was making my interpretation from
(B)Limitation
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.
Basically I think it says that when you receive a distribution, you look back 1 year to see if you had received another distribution that counted as a rollover. If you did, then the new one can't be a rollover. It doesn't say anything about when the rollover was deposited - so that's why I think we can get the weird ordering where depositing the first check last causes the second check (which was deposited first) to become a failed rollover.

You just have to be pretty sure that you remember getting the larger one first, and then a day later getting the smaller one. (I frequently get statements mailed at the same time from my bank but receive them on different days.)

btw, do the check images you mentioned show the timestamp on the backs of each deposit? Also, I know this is incredibly unlikely after so many eyeballs have looked, but is the front of the check made out to <your name> or "Ally Bank FBO <your name>"? I can't believe Merrill didn't use the latter one if you specifically told them you were doing a rollover.
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Re: IRA rollover problem. Please help

Post by MarkNYC »

gobel wrote: Mon May 03, 2021 2:00 am
Here's their blog post that probably covers the first item and seems to support what I said about counting the day you received each check, not when they were deposited: https://www.irahelp.com/slottreport/wha ... a-rollover , read down to the 4th paragraph.

Here's the actual Sec. 408(d)(3)(B) that I was making my interpretation from
(B)Limitation
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.
Basically I think it says that when you receive a distribution, you look back 1 year to see if you had received another distribution that counted as a rollover. If you did, then the new one can't be a rollover. It doesn't say anything about when the rollover was deposited ..

You just have to be pretty sure that you remember getting the larger one first, and then a day later getting the smaller one.
I agree with your interpretation. In the OP's situation, this means that Ally bank cannot determine on its own which of the two rollovers was improper and constitutes an excess contribution. Ally must rely on information provided by the taxpayer.

Without any proof of which check was received first, it might be assumed both checks dated the same day were received the same day (perhaps in the same envelope), in which case I see nothing in the law that would prevent the taxpayer from selecting which of the two checks should be treated as a taxable distribution and removed as an excess contribution.
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

Yes, I should have mentioned this parallels the point you made earlier. I tweaked it slightly in case OP remembers that he did receive the big check first. I think it makes the outcome more definite and goes from saying "I choose to have the first deposit returned" to "I must have the first deposit returned". However, either way it sounds like the OP is at the mercy of some person in Ally to decide what to do.

What surprises me is that the Custodian has any say at all and can just make an arbitrary decision based on what they think happened. I guess that's why Alan has been pretty conservative with his suggestions - maybe he has dealt with this before and seen it go both ways. As a layman, I just assumed that I could tell the Custodian to return $X+earnings that I put in on day Y because they were from a failed rollover and they would do it. Without the full picture, the Custodian can't even always know what is a mistake or not.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Update: Someone from Ally bank called me. She was from IRA dept. Very nice lady and very helpful. She said they are okay with big check to be rolled over and the small check to be converted to Roth IRA

She said she needs time. She said she had a meeting with analysts and tax people to make sure if this is okay in every angle and she got approved.

My question is how do I make sure this is what they will do. What documents or assurances should I ask? I don't want to be shocked at the end of the year though she knew what she was talking about.
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Re: IRA rollover problem. Please help

Post by cresive »

Econberkeley wrote: Thu Apr 22, 2021 7:30 am I had 2 separate IRA accounts in Merrill Edge. One of them was SEP IRA ( $40K) and the other was Traditional IRA ($350K). I wanted to transfer them to Allybank to take advantage of the IRA savings account and earn interest because Merrill Edge did not offer this type of IRA account.

Also, I wanted to combine these 2 IRA accounts because I read some articles that from IRS' perspective, they are essentially the same thing and no need to keep 2 separate IRA accounts because they are both before tax retirement accounts.

So I called Allybank and told them I want these 2 IRA accounts to be combined in one account in their bank. They pointed me to some forms which I filled out and scanned and uploaded via their secure messaging system. I tried this twice with no success because Ally bank keep telling me form was not filled correctly and then Merril Edge sent me a letter asking for medallion signature. 3 months passed I was so pissed off so I called Merrill and told them to sent me a check.

2 checks arrived with my name on it. That is when I became aware of 60 day rule and once per year rule. But it was too late. Talked to so many financial advisors where the Allybank customer service was the absolute worst. I was able to deposit 2 checks into one account in Allybank in a matter of weeks. So there is no 60 day rule problem here.

The problem was that the IRS rule states that I am only allowed to rollover 1 IRA account once per year regardless of how many IRAs I own. Most tax attorneys I talked to, agreed that I should call Allybank and withdraw the small amount check and deposit to my cash account. I would pay 10% penalty on $40K plus $40K would be added to my income in 2020. Some tax professionals told me the one per year is not per person it is per account but I think it is not true because I read the IRS publication about it. Just for clarification, what I did was a indirect rollover where 60 day rule and once per year applies. For the direct rollovers (trustee to trustee rolloever), there is no IRS rule.

Am I missing something here? Am I too late to fix this problem? (Checks were cut on March 5, 2021 and I deposited them in Allybank in 2 weeks)

If I have to pay penalty on this 2nd check ( it is not technically 2nd but it is the lower of the 2 checks) then can I apply exception to this penalty? I found 2 exceptions where I can use this $40K towards. One of them is school tuition. IRS says this IRA amount could be used towards a higher education tuition. I am not sure what is higher education. My 6 year old son is attending a private special needs kids school and I am paying $36K per year.

The 2nd exception I can use is medical expenses. I am already deducting every year and it is around $20K per year. I am only deducting the portion above 10% of my AGI. But separately, to apply for the exception, is it the whole $20K or the portion 10% above my AGI should be applied?

Any input would be greatly appreciated.
I didn't see this fact brought up in reading the thread, and I don't think it will help you for your current example, but I think you can do as many transfers as you wish as long as you don't touch the money, personally--i.e. Trustee to Trustee transfers. See the code here:


"However, trustee-to-trustee transfers between IRAs aren’t limited and rollovers from traditional IRAs to Roth IRAs (conversions) aren’t limited."
Publication 590-A Contributions to Individual Retirement Arrangements (IRAs) For use in preparing 2020 Returns

If you had set up a direct transfer, which has its own issues, then you would have been okay.

For what it is worth,
Ben
MarkNYC
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Econberkeley wrote: Wed May 05, 2021 10:34 pm Update: Someone from Ally bank called me. She was from IRA dept. Very nice lady and very helpful. She said they are okay with big check to be rolled over and the small check to be converted to Roth IRA

She said she needs time. She said she had a meeting with analysts and tax people to make sure if this is okay in every angle and she got approved.

My question is how do I make sure this is what they will do. What documents or assurances should I ask? I don't want to be shocked at the end of the year though she knew what she was talking about.
I am glad to hear that Ally bank has changed their mind and agreed to do the right thing. With that dispute resolved, you should focus on the 60-day deadline:

1. You should make Ally aware of the upcoming deadline
2. You should have Ally confirm that you have properly submitted all required forms needed to execute the $40K Roth conversion.

Retaining evidence of having done the above should qualify you for automatic IRS relief in the event Ally does not complete the transaction by the 60-day deadline.
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JamesSFO
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Re: IRA rollover problem. Please help

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Glad you are getting towards resolution!
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Wed May 05, 2021 10:34 pm Update: Someone from Ally bank called me. She was from IRA dept. Very nice lady and very helpful. She said they are okay with big check to be rolled over and the small check to be converted to Roth IRA

She said she needs time. She said she had a meeting with analysts and tax people to make sure if this is okay in every angle and she got approved.

My question is how do I make sure this is what they will do. What documents or assurances should I ask? I don't want to be shocked at the end of the year though she knew what she was talking about.
Good, this is major progress.
But it does not clarify how Ally will close the loop and what paper trail will be created.
1) Are they going to process an excess contribution removal of 43k from the TIRA and issue a corrective 1099R next January?
or
2) Reconstruct the rollover of the smaller check to appear that you requested a conversion from the start for the smaller check, and transfer the appropriate amount to your Roth IRA without reporting the removal of the excess contribution? That would be tantamount to never having created an excess contribution in the first place. It would be much easier for both you and Ally, but the IRS would probably not be happy if they ever audited Ally for any reason.

1) is technically correct and triggers more reporting on your 2021 return, but 2) is easier and eliminates a 1099R from Ally.
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Re: IRA rollover problem. Please help

Post by Alan S. »

gobel wrote: Mon May 03, 2021 9:59 pm Yes, I should have mentioned this parallels the point you made earlier. I tweaked it slightly in case OP remembers that he did receive the big check first. I think it makes the outcome more definite and goes from saying "I choose to have the first deposit returned" to "I must have the first deposit returned". However, either way it sounds like the OP is at the mercy of some person in Ally to decide what to do.

What surprises me is that the Custodian has any say at all and can just make an arbitrary decision based on what they think happened. I guess that's why Alan has been pretty conservative with his suggestions - maybe he has dealt with this before and seen it go both ways. As a layman, I just assumed that I could tell the Custodian to return $X+earnings that I put in on day Y because they were from a failed rollover and they would do it. Without the full picture, the Custodian can't even always know what is a mistake or not.
I think the custodian is definitely on the hot seat because they must make the decision whether or not to allow the IRA owner to "elect" which rollover contribution is the excess one.

Example:
TP receives 3 different distribution checks days apart and rolls them all over within 60 days to 3 different custodians who do not know about the other rollovers. For example, 3 bank CDs of 250k each.

Several months later, TP learns about the violation, perhaps from their tax preparer when looking at the 3 1099R forms. TP accordingly selects the two banks with the lower interest rates and tells those banks to treat their CDs as excess contributions. Most likely, the bank has no firm written policy how to respond. How do they know that their deposit is an excess contribution at all without some investigation? Or is it likely that in any such investigation one or more banks will take the position that the first rollover is the valid one, denying any flexibility that TP has in selecting the excess contribution?

Moreover, if a bank agrees to treat their CD as an excess regular IRA contribution and distributes it with earnings, it appears that Box 2a of the 1099R will only include the earnings, not the excess amount. That leaves it to the IRS to make sure that TP reported the original distribution as taxable, and not as a rollover and recognizes that any 5498 reporting a rollover contribution has been superseded. The IRS is further impeded by the rollover limitation running 12 months not connected in any way with CY tax reporting.

And if the bank refuses to comply, TP becomes subject to 6% excise taxes.

Exact same situation occurs if a TP rolls over their RMD. Strangely enough, this may be the first active case dealing with these issues I have seen, yet it cannot be that rare.
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Alan S. wrote: Thu May 06, 2021 2:21 pm
gobel wrote: Mon May 03, 2021 9:59 pm
What surprises me is that the Custodian has any say at all and can just make an arbitrary decision based on what they think happened. I guess that's why Alan has been pretty conservative with his suggestions - maybe he has dealt with this before and seen it go both ways. As a layman, I just assumed that I could tell the Custodian to return $X+earnings that I put in on day Y because they were from a failed rollover and they would do it. Without the full picture, the Custodian can't even always know what is a mistake or not.
I think the custodian is definitely on the hot seat because they must make the decision whether or not to allow the IRA owner to "elect" which rollover contribution is the excess one.

Example:
TP receives 3 different distribution checks days apart and rolls them all over within 60 days to 3 different custodians who do not know about the other rollovers. For example, 3 bank CDs of 250k each.

Several months later, TP learns about the violation, perhaps from their tax preparer when looking at the 3 1099R forms. TP accordingly selects the two banks with the lower interest rates and tells those banks to treat their CDs as excess contributions. Most likely, the bank has no firm written policy how to respond. How do they know that their deposit is an excess contribution at all without some investigation? Or is it likely that in any such investigation one or more banks will take the position that the first rollover is the valid one, denying any flexibility that TP has in selecting the excess contribution?
Alan -- The way the law is written, the distribution check received first would be the valid rollover, and this is something the IRA custodian cannot know and the taxpayer might be unable to prove. So I think the custodian should be allowed (perhaps required) to follow the excess contribution withdrawal instructions submitted by the taxpayer, regardless of whether the instructions are submitted a few weeks or a few years after the rollover deposit.

If the related tax returns are prepared incorrectly, either unintentionally or not, that would seem to be an issue between the taxpayer and the IRS. The custodian should be absolved unless it had reason to know at the time that the 1099-R should have been prepared differently.
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Re: IRA rollover problem. Please help

Post by Alan S. »

MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Code Sec 408(d)(3)(B) states that a 60-day tax free rollover of an IRA distribution will not be allowed if during the prior 12 months the taxpayer "received any other amount from an IRA which was not includible in his gross income because of the application of this paragraph" (ie rollover). So even if the $40K distribution was deposited first, if it is returned and included in income, then the subsequent $342K rollover should be valid, based on the language of the law.
Mark, if the custodian should be allowed to execute TP's instructions with respect to excess contribution treatment of a rollover, and the TP must then correctly report the 1099R activity that results, what do you think the IRS' position should be in light of the above code section? 408(d)(3) itself seems subject to interpretation.

1) Assuming all rollovers are eligible other than the one rollover limit, only the first distribution rolled over is valid and any later ones are excess contributions because the first one is not eligible to be treated as excess.
or
2) Taxpayer should be able to use corrective distributions to select which distribution that was rolled over is an excess contribution regardless of the order the rollovers were done. In the above quote, you indicated that this interpretation should apply.

I haven't seen even anecdotal indications of how the IRS actually interprets this section.
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Alan S. wrote: Fri May 07, 2021 12:42 pm
MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Code Sec 408(d)(3)(B) states that a 60-day tax free rollover of an IRA distribution will not be allowed if during the prior 12 months the taxpayer "received any other amount from an IRA which was not includible in his gross income because of the application of this paragraph" (ie rollover). So even if the $40K distribution was deposited first, if it is returned and included in income, then the subsequent $342K rollover should be valid, based on the language of the law.
Mark, if the custodian should be allowed to execute TP's instructions with respect to excess contribution treatment of a rollover, and the TP must then correctly report the 1099R activity that results, what do you think the IRS' position should be in light of the above code section? 408(d)(3) itself seems subject to interpretation.

1) Assuming all rollovers are eligible other than the one rollover limit, only the first distribution rolled over is valid and any later ones are excess contributions because the first one is not eligible to be treated as excess.
or
2) Taxpayer should be able to use corrective distributions to select which distribution that was rolled over is an excess contribution regardless of the order the rollovers were done. In the above quote, you indicated that this interpretation should apply.

I haven't seen even anecdotal indications of how the IRS actually interprets this section.
It's hard to know how the IRS would react. My guess is the IRS would react only if they saw on a tax return 2 (or more) indirect, tax-free rollovers, by the same taxpayer if jointly filed. They would probably take the simplified position of either (1) treating the larger of the 2 rollovers as invalid and taxable and let the taxpayer prove otherwise, or (2) ask for the dates of the 2 rollovers and treat the second one as invalid and taxable. I also wouldn't be surprised if the IRS failed to detect the violation despite the clear evidence, given their long-standing inability to detect untaken RMDs.

My point in bolding the section of the law above is this: when there are 2 indirect rollovers during a 12-month period (assume calendar year), the existence of an invalid rollover and excess contribution is implied, but can't be known until the tax return is filed showing one or both rollovers as tax-free.

For example, getting back to the OP's situation, suppose Ally insisted the $40K rollover was first so only the $340K rollover could be withdrawn as an excess contribution, and it was now too late for a Roth conversion. I might consider doing the following: leave both rollovers alone - withdraw nothing, and on the tax return next year treat the $40K distribution as taxable even though rolled over. Result- neither is an excess contribution because neither is preceded by a tax-free rollover. The problem here is the $40K gets taxed again years from now as part of RMDs, but this seems preferable to current tax plus 10% on $340K. Would this work? Maybe.

The law as written seems to have the potential for some complicated and difficult interpretations and tax compliance decisions.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Thu May 06, 2021 1:12 pm
Econberkeley wrote: Wed May 05, 2021 10:34 pm Update: Someone from Ally bank called me. She was from IRA dept. Very nice lady and very helpful. She said they are okay with big check to be rolled over and the small check to be converted to Roth IRA

She said she needs time. She said she had a meeting with analysts and tax people to make sure if this is okay in every angle and she got approved.

My question is how do I make sure this is what they will do. What documents or assurances should I ask? I don't want to be shocked at the end of the year though she knew what she was talking about.
Good, this is major progress.
But it does not clarify how Ally will close the loop and what paper trail will be created.
1) Are they going to process an excess contribution removal of 43k from the TIRA and issue a corrective 1099R next January?
or
2) Reconstruct the rollover of the smaller check to appear that you requested a conversion from the start for the smaller check, and transfer the appropriate amount to your Roth IRA without reporting the removal of the excess contribution? That would be tantamount to never having created an excess contribution in the first place. It would be much easier for both you and Ally, but the IRS would probably not be happy if they ever audited Ally for any reason.

1) is technically correct and triggers more reporting on your 2021 return, but 2) is easier and eliminates a 1099R from Ally.
Currently they did what they promised to do. 342K is in Traditional IRA and 46K is in Roth IRA. I also made sure there will be no distribution on paper or physical. One rollover and one traditional to roth conversion that's it.

Now I will call them on how they did the paperwork. I will report it here.
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