IRA rollover problem. Please help

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Topic Author
Econberkeley
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Joined: Thu Jan 16, 2014 6:51 pm

IRA rollover problem. Please help

Post by Econberkeley »

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.
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David Jay
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Re: IRA rollover problem. Please help

Post by David Jay »

Here is the link to IRS Publication 590a, go through pages 21-26 carefully: https://www.irs.gov/pub/irs-pdf/p590a.pdf

Those pages spell out everything, including possible waivers. You may have a way out because one of the accounts was a SEP. I glanced through it but did not try to fully understand the implications for your situation.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

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.

Once you became aware of the one rollover rule before you sent the funds to Ally, you could have somewhat reduced the damage by converting the 40k check to an Ally Roth savings account. You would still be taxed on 40k, but the funds would still be in an IRA and a better type of IRA. Also, there is no penalty on conversions.
Also, if you had explained to ML what you intended to do with the funds before the distribution (rollovers), they MIGHT HAVE (no guarantee) alerted you to the one rollover limitation. You could then have combined the two accounts in ML by direct transfer (no rollover), then you would only have received one distribution.


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 rollover), there is no IRS rule.

Yes, the rollover limit is per person. It used to be per account until 2015 when the IRS changed their interpretation of the tax code to stop people from using IRAs for temporary loans. So now you have a taxable distribution of 40,000 which must be reported on your tax return AND you have an excess regular IRA contribution (not a rollover because it was not eligible for rollover) to request Ally to return to you with allocated earnings. The earnings are taxable in 2021 which is the year you made the excess TIRA contribution. A 1099R will be issued to code the taxable amount for that appropriate tax year.

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)

You have it pretty much figured out. Unfortunately, there is no workaround to this at this point, like there might have been before you actually sent the funds to Ally.


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.

Yes, for any portion of the 40,000 that is covered by any of the IRS penalty waiver situations, you can file Form 5329 and claim a penalty exception. The medical expenses are the total of your unreimbursed medical expenses (but not pre tax health insurance premiums through employer) that you could have deducted (including for dependents) that exceed 7.5% of your 2021 AGI. You do not have to actually itemize.

Unfortunately, the higher education penalty waiver is limited to post secondary education (post HS), and there is no exception for special needs education for younger kids. Following is a list of all the penalty exceptions available. Look under the IRA column: https://www.irs.gov/retirement-plans/pl ... tributions


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?

Only the amount above 7.5% (not 10%) of 2021 AGI.

Any input would be greatly appreciated.
lws
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Re: IRA rollover problem. Please help

Post by lws »

Table 1-4., Rollover Chart, of the publication will quickly answer your question.

Seems like you are not qualified for a waiver but check the publication yourself.
Topic Author
Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Thanks for all the input

I spoke to an IRA specialist in Fidelity and she said I can not apply for exception in tax penalty. Here is why;

The exception to the tax penalty only applies to distribution of IRA where I deposit the check to my checking account. But in my case I did not deposit the check to the checking account, I deposited into a Traditional IRA account (wrongfully).

So what I should be doing is filling out a form called "return of excess IRA contribution" and let Allybank transfer the $40K plus the interest in the last one month it earned to my checking account. But I can not use an exception because this money was not a result of distribution, rather it was a result of return of excess IRA contribution. (per the lady in Fidelity)

What do you guys think?
MarkNYC
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Econberkeley wrote: Thu Apr 22, 2021 8:41 pm I spoke to an IRA specialist in Fidelity and she said I can not apply for exception in tax penalty. Here is why;

The exception to the tax penalty only applies to distribution of IRA where I deposit the check to my checking account. But in my case I did not deposit the check to the checking account, I deposited into a Traditional IRA account (wrongfully).

So what I should be doing is filling out a form called "return of excess IRA contribution" and let Allybank transfer the $40K plus the interest in the last one month it earned to my checking account. But I can not use an exception because this money was not a result of distribution, rather it was a result of return of excess IRA contribution. (per the lady in Fidelity)

What do you guys think?
I think the Fidelity IRA specialist is mistaken. The IRA distribution that was deposited (rolled over) to an IRA account is disallowed as a rollover contribution due to the one year rule and must be returned (tax-free) as an excess contribution. The original IRA distribution, not being eligible for rollover, is includible in gross income therefore it's eligible for an exception to the 10% penalty per Code Sec. 72t.

What matters is not where the distribution check was deposited, but whether or not the distribution is taxable.

I thought Fidelity did not give legal or tax advice?
Topic Author
Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

MarkNYC wrote: Thu Apr 22, 2021 10:20 pm
Econberkeley wrote: Thu Apr 22, 2021 8:41 pm I spoke to an IRA specialist in Fidelity and she said I can not apply for exception in tax penalty. Here is why;

The exception to the tax penalty only applies to distribution of IRA where I deposit the check to my checking account. But in my case I did not deposit the check to the checking account, I deposited into a Traditional IRA account (wrongfully).

So what I should be doing is filling out a form called "return of excess IRA contribution" and let Allybank transfer the $40K plus the interest in the last one month it earned to my checking account. But I can not use an exception because this money was not a result of distribution, rather it was a result of return of excess IRA contribution. (per the lady in Fidelity)

What do you guys think?
I think the Fidelity IRA specialist is mistaken. The IRA distribution that was deposited (rolled over) to an IRA account is disallowed as a rollover contribution due to the one year rule and must be returned (tax-free) as an excess contribution. The original IRA distribution, not being eligible for rollover, is includible in gross income therefore it's eligible for an exception to the 10% penalty per Code Sec. 72t.

What matters is not where the distribution check was deposited, but whether or not the distribution is taxable.

I thought Fidelity did not give legal or tax advice?
I am not sure what Fidelity should do or should not do, I asked and they replied :)

I am hoping that you are right, but then how do I make sure what I am doing is right? Talk to a tax advisor? I did that in the last 1 month and believe me some of them give bad advice though most agree on the same conclusion.

I wish there was a way to call IRS.
jimmyg
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Re: IRA rollover problem. Please help

Post by jimmyg »

Econberkeley wrote: Fri Apr 23, 2021 8:01 am I wish there was a way to call IRS.
It might take some time to get through, but they still show "IRS Phone Numbers" as the last section at https://www.irs.gov/help/telephone-assistance
MarkNYC
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Econberkeley wrote: Fri Apr 23, 2021 8:01 am
MarkNYC wrote: Thu Apr 22, 2021 10:20 pm
Econberkeley wrote: Thu Apr 22, 2021 8:41 pm I spoke to an IRA specialist in Fidelity and she said I can not apply for exception in tax penalty. Here is why;

The exception to the tax penalty only applies to distribution of IRA where I deposit the check to my checking account. But in my case I did not deposit the check to the checking account, I deposited into a Traditional IRA account (wrongfully).

So what I should be doing is filling out a form called "return of excess IRA contribution" and let Allybank transfer the $40K plus the interest in the last one month it earned to my checking account. But I can not use an exception because this money was not a result of distribution, rather it was a result of return of excess IRA contribution. (per the lady in Fidelity)

What do you guys think?
I think the Fidelity IRA specialist is mistaken. The IRA distribution that was deposited (rolled over) to an IRA account is disallowed as a rollover contribution due to the one year rule and must be returned (tax-free) as an excess contribution. The original IRA distribution, not being eligible for rollover, is includible in gross income therefore it's eligible for an exception to the 10% penalty per Code Sec. 72t.

What matters is not where the distribution check was deposited, but whether or not the distribution is taxable.

I thought Fidelity did not give legal or tax advice?
I am not sure what Fidelity should do or should not do, I asked and they replied :)

I am hoping that you are right, but then how do I make sure what I am doing is right? Talk to a tax advisor? I did that in the last 1 month and believe me some of them give bad advice though most agree on the same conclusion.

I wish there was a way to call IRS.
If you want, you can call the IRS Office of Chief Counsel. This is an IRS office of approximately 1500 attorneys whose role is to provide objective legal guidance to the IRS and to taxpayers regarding proper interpretation of federal tax laws. The individual who specializes in Code Sec 72t (10% IRA penalty) is Pamela Kinard 202-317-6000.
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

Mark is correct.

While you may have deposited the money in an IRA, it was not eligible for rollover and is therefore a taxable distribution and subject to tax and penalty. You do not apply for a penalty waiver, but if you qualify under the IRS penalty waiver provisions, you can claim the waiver on Form 5329 by entering the applicable exception code on line 2. The medical exception code is 05. If you qualify for more than one type of exception, use code 12 and add an explanatory statement with the breakdown.

When you request a return of the excess contribution to the IRA, be sure Fidelity understands that the excess amount was due to rolling over more than one distribution. They may ask for evidence of that, because their 1099R coding for the removal of excess results in the excess amount being non taxable, because you already are being taxed on the first distribution. But the earnings are subject to the penalty. Your exceptions are limited to the aggregate amount of exceptions you have, they do not apply separately to each distribution.
Topic Author
Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

I received a call from Ally which was the new brokerage that I deposited the checks. The customer service lady understood the problem and gave me a call and she was very confident with the following offer;

She told me to call Merrill Lynch where the IRA accounts were originally located, and tell them to send Ally Bank a coding letter. She said coding letter is an industry standard and everybody knows how it is filled and used. Basically the coding letter will say one of the IRAs is coded as TRUSTEE to TRUSTEE transfer.

I called Merrill they said they know what a coding letter is but they will never write a letter saying they did something that they actually did not. I was expecting this answer but tried anyway.

So at this point I will be calling Ally to let them send me or download the form called "return of excess distribution". With this letter the 40K plus the small interest that I earned will be transferred to my checking account.

Next year while doing my taxes I will report this in my taxes and also I will file for exception for medical expenses for the portion above (7.5% or 10%) above my AGI.

I guess that is my plan for now. Anything I am missing?
Topic Author
Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

MarkNYC wrote: Fri Apr 23, 2021 8:53 am
Econberkeley wrote: Fri Apr 23, 2021 8:01 am
MarkNYC wrote: Thu Apr 22, 2021 10:20 pm
Econberkeley wrote: Thu Apr 22, 2021 8:41 pm I spoke to an IRA specialist in Fidelity and she said I can not apply for exception in tax penalty. Here is why;

The exception to the tax penalty only applies to distribution of IRA where I deposit the check to my checking account. But in my case I did not deposit the check to the checking account, I deposited into a Traditional IRA account (wrongfully).

So what I should be doing is filling out a form called "return of excess IRA contribution" and let Allybank transfer the $40K plus the interest in the last one month it earned to my checking account. But I can not use an exception because this money was not a result of distribution, rather it was a result of return of excess IRA contribution. (per the lady in Fidelity)

What do you guys think?
I think the Fidelity IRA specialist is mistaken. The IRA distribution that was deposited (rolled over) to an IRA account is disallowed as a rollover contribution due to the one year rule and must be returned (tax-free) as an excess contribution. The original IRA distribution, not being eligible for rollover, is includible in gross income therefore it's eligible for an exception to the 10% penalty per Code Sec. 72t.

What matters is not where the distribution check was deposited, but whether or not the distribution is taxable.

I thought Fidelity did not give legal or tax advice?
I am not sure what Fidelity should do or should not do, I asked and they replied :)

I am hoping that you are right, but then how do I make sure what I am doing is right? Talk to a tax advisor? I did that in the last 1 month and believe me some of them give bad advice though most agree on the same conclusion.

I wish there was a way to call IRS.
If you want, you can call the IRS Office of Chief Counsel. This is an IRS office of approximately 1500 attorneys whose role is to provide objective legal guidance to the IRS and to taxpayers regarding proper interpretation of federal tax laws. The individual who specializes in Code Sec 72t (10% IRA penalty) is Pamela Kinard 202-317-6000.
Thanks I called her and left a message. I will share if I hear anything different from her but I doubt it.
Topic Author
Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

1) I forgot to mention about the 20% witholding tax

When I initially asked for the checks from Merrill, they asked me if I wanted 20% tax witheld and I said no. Because I see no reason

Can someone chime on this? I am still not sure why this is asked in the first place. Will this be a problem?

2) After I deposited 2 checks to Ally, I received 2 seperate checks again from Merrill one for 24 cents and one for $1.50

I forwarded them to Ally along with IRA rollover form. They mistakenly deposited this to my checking account. I am trying to resolve the problem now but given how slow and incompetent they are, what if it says in my checking account and I am not able to transfer to IRA account? What to do here?

(I know it is all messed up)
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Sat Apr 24, 2021 11:21 am 1) I forgot to mention about the 20% witholding tax

When I initially asked for the checks from Merrill, they asked me if I wanted 20% tax witheld and I said no. Because I see no reason

Can someone chime on this? I am still not sure why this is asked in the first place. Will this be a problem?

2) After I deposited 2 checks to Ally, I received 2 seperate checks again from Merrill one for 24 cents and one for $1.50

I forwarded them to Ally along with IRA rollover form. They mistakenly deposited this to my checking account. I am trying to resolve the problem now but given how slow and incompetent they are, what if it says in my checking account and I am not able to transfer to IRA account? What to do here?

(I know it is all messed up)
While you earlier mentioned something about your 2020 income, in another place you stated these checks were issued in March, 2021. Therefore, the fallout will all be on your 2021 return.

I do not know where ML came up with the 20% withholding rate since the default rate for IRAs is 10%. Was withholding taken out of these two checks or not? You had the option to decline withholding altogether, which is the decision you would ordinarily make if you intended to roll these distributions over.

You are still within 60 days of the distributions, so for the one allowed rollover if you rolled over net of withholding you can still replace the amount withheld and make the one allowed rollover complete. The two small checks are probably for market interest that had not posted when you did the other rollovers. You would just cash these or deposit in checking, but these amounts will be included in the 1099R forms you get next January. Hopefully, these small amounts ARE in your checking account because they are additional distributions not eligible for rollover. If you had originally done a direct trustee transfer, these two small amounts would have been automatically forwarded to Ally, so this is another small issue with taking an actual distribution and trying to do 60 day rollovers.

One last option you have to mitigate some damage, but it adds more complexity. The excess rollover of 40k must be distributed as an excess contribution, but you still have a very limited window to get that money distributed back to you from Ally, and you could then convert 40,000 to a Roth IRA. The reason you can do this is because Roth conversions do not count against the one rollover limit. While the conversion will still be taxable, it would retain your IRA funds in a better type of IRA (Roth) and this would also eliminate the penalty on the distribution. The 60 day deadline to do this ends on 5/4. If you happened to have another 40k available you could just convert it now to make sure you meet the deadline, then just keep the returned excess contribution from Ally to reimburse yourself.

End result will be that you converted 40k and rolled the rest to the Ally TIRA. This is a better outcome for you if you can pull it off then just keeping the excess in a taxable account.

Please clarify if any withholding was taken out of the ML distributions or not.
Topic Author
Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Sat Apr 24, 2021 12:47 pm
Econberkeley wrote: Sat Apr 24, 2021 11:21 am 1) I forgot to mention about the 20% witholding tax

When I initially asked for the checks from Merrill, they asked me if I wanted 20% tax witheld and I said no. Because I see no reason

Can someone chime on this? I am still not sure why this is asked in the first place. Will this be a problem?

2) After I deposited 2 checks to Ally, I received 2 seperate checks again from Merrill one for 24 cents and one for $1.50

I forwarded them to Ally along with IRA rollover form. They mistakenly deposited this to my checking account. I am trying to resolve the problem now but given how slow and incompetent they are, what if it says in my checking account and I am not able to transfer to IRA account? What to do here?

(I know it is all messed up)
While you earlier mentioned something about your 2020 income, in another place you stated these checks were issued in March, 2021. Therefore, the fallout will all be on your 2021 return.

I do not know where ML came up with the 20% withholding rate since the default rate for IRAs is 10%. Was withholding taken out of these two checks or not? You had the option to decline withholding altogether, which is the decision you would ordinarily make if you intended to roll these distributions over.

You are still within 60 days of the distributions, so for the one allowed rollover if you rolled over net of withholding you can still replace the amount withheld and make the one allowed rollover complete. The two small checks are probably for market interest that had not posted when you did the other rollovers. You would just cash these or deposit in checking, but these amounts will be included in the 1099R forms you get next January. Hopefully, these small amounts ARE in your checking account because they are additional distributions not eligible for rollover. If you had originally done a direct trustee transfer, these two small amounts would have been automatically forwarded to Ally, so this is another small issue with taking an actual distribution and trying to do 60 day rollovers.

One last option you have to mitigate some damage, but it adds more complexity. The excess rollover of 40k must be distributed as an excess contribution, but you still have a very limited window to get that money distributed back to you from Ally, and you could then convert 40,000 to a Roth IRA. The reason you can do this is because Roth conversions do not count against the one rollover limit. While the conversion will still be taxable, it would retain your IRA funds in a better type of IRA (Roth) and this would also eliminate the penalty on the distribution. The 60 day deadline to do this ends on 5/4. If you happened to have another 40k available you could just convert it now to make sure you meet the deadline, then just keep the returned excess contribution from Ally to reimburse yourself.

End result will be that you converted 40k and rolled the rest to the Ally TIRA. This is a better outcome for you if you can pull it off then just keeping the excess in a taxable account.

Please clarify if any withholding was taken out of the ML distributions or not.
Woow this is a perfect solution

The date on the checks were 3/5/2021. So is the 60 day rule starts 3/5/2021 or when I received the checks?

So I have until 5/5/2021 to do conversion to Roth IRA? Also by converting to Roth IRA, I would avoid tax penalty and only pay income tax on this, right?

As for your last question, ML did not withhold any taxes.
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

The 60 day rollover period starts on the day after you received the distribution. For example, if you received it on 3/9, the conversion contribution to the Roth IRA must be made by 5/8. And if you do not have a Roth IRA open, you will have to open one. Still a tight squeeze if you have to use the funds returned by Ally to fund the conversion.

It might be possible for Ally to immediately move the funds removed from the TIRA into a Roth without actually sending them to you or to your checking. But if they will do this, be sure they understand what you want. If the amount removed from the TIRA is over 40,000 due to earnings, do NOT convert more than 40,000. Let any earnings go to your checking account.

If the amount removed is less than 40,000 due to investment losses or Ally penalties, move enough from your checking account to bring it up to a 40,000 conversion. In other words, gain or loss while with Ally on the 40,000, only convert 40,000 exactly.
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celia
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Re: IRA rollover problem. Please help

Post by celia »

Econberkeley wrote: Thu Apr 22, 2021 7:30 am 2 checks arrived with my name on it. [Were the checks made out to you or to Ally?] . . . . I was able to deposit 2 checks into one account in Allybank in a matter of weeks.

. . . 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)
Econberkeley wrote: Thu Apr 22, 2021 8:41 pm I spoke to an IRA specialist in Fidelity and she said I can not apply for exception in tax penalty. Here is why;

The exception to the tax penalty only applies to distribution of IRA where I deposit the check to my checking account. But in my case I did not deposit the check to the checking account, I deposited into a Traditional IRA account (wrongfully).

. . .What do you guys think?

I think you may be confused since you seem to be mixing up your terminology. Maybe you misunderstood something or can't explain it well. Earlier answers above were based on what you wrote rather than what I think you meant. As far as I can tell, there are no problems here, other than the contradictory explanations you have written here. This makes it hard for me, at least, to understand what happened.

Regarding the definitions:
A trustee-to-trustee rollover is when the check is made out from one trustee to another. The check can be sent to the new custodian or to you to make a photocopy (for your records) and then send it on to the new custodian. For the money to go into the correct person's account, it will usually say "For Benefit Of <Econberkeley>" or "FBO <Econberkeley>" and it will say it's coming from an IRA. If the check is mailed to you, you are responsible for making sure it is delivered within 60 days of when the check was printed. (You can do as many trustee-to-trustee rollovers per year as you want.)

An indirect rollover is when a check is made payable to you and you can then cash it or put it in your checking account. To avoid paying any taxes on this, you write a personal check made out to the custodian with a note or form indicating which account it should be deposited in. Your check also needs to be received within 60 days. (If you do an indirect rollover, you must wait 365 days before you do another one.)

Using these definitions, was the $350K check a trustee-to-trustee check or a check made out to you?
Was the $40K check a trustee-to-trustee check or a check made out to you?


If both checks were made out to Ally with a "FBO <Econberkeley>" notation, you can't deposit those, only Ally can, and there are no problems here with the trustee-to-trustee rollovers.

Please advise which situation we are talking about here.

------------------------------------
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.
This is not related to the problem you mentioned, but there are, indeed, reasons to keep some of your tax-deferred accounts separate from each other. In most cases it doesn't matter, but sometimes it is better to keep employer plans separate from your personal IRAs (that you contributed to outside of your employer). You probably should have rolled the SEP IRA into an employer plan, if you have one. Some employer plans do not accept any rollovers except from other employer plans. Now, you apparently have a "mixed" IRA.

You also might have the need to do a Backdoor Roth some day and want to avoid the pro rata rule by transferring your IRA(s) to an employer plan if they accept them. When they do, there can't be any non-deductible contributions in the rollover.

And if you change employers, the new employer might not have a 401K, so you might want to roll the 401K from an old employer to a Rollover IRA, which is a traditional IRA meant to hold only money that came from an employer plan. If you mix it with an IRA that holds IRA contributions you made, this may make it ineligible to a future rollover when the new employer starts a 401K.

Usually these things don't happen, but they can, so you should be aware of this.
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celia
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Re: IRA rollover problem. Please help

Post by celia »

Econberkeley wrote: Sat Apr 24, 2021 11:21 am 1) I forgot to mention about the 20% witholding tax

When I initially asked for the checks from Merrill, they asked me if I wanted 20% tax witheld and I said no. Because I see no reason

Can someone chime on this? I am still not sure why this is asked in the first place. Will this be a problem?
No problem. They are asking that in case the rollover becomes taxable (so some taxes need to be paid). It will be taxable if the withdrawal is left in a Taxable account or you roll it over to a Roth.
2) After I deposited 2 checks to Ally, I received 2 seperate checks again from Merrill one for 24 cents and one for $1.50

I forwarded them to Ally along with IRA rollover form. They mistakenly deposited this to my checking account. I am trying to resolve the problem now but given how slow and incompetent they are, what if it says in my checking account and I am not able to transfer to IRA account? What to do here?
If it stays in your checking account, you will have to pay taxes on this on your 2021 tax return since it is considered an IRA withdrawal. The tax on $1.74 might be around $0.35. Can you afford this? (I'd drop trying to get them to fix it, since it's not worth your time. If they fix it, fine. If they don't, fine.) But watch out, if you are under 59.5, since there would also be a 10% early withdrawal penalty. Oh, no, another $0.17 will go to the IRS! But most likely, that will be rounded to the closest dollar, or $0, when you file your taxes.

Don't try to do an indirect rollover on this (by sending a check into your IRA for $1.74).
:oops:
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: Sat Apr 24, 2021 3:29 pm The 60 day rollover period starts on the day after you received the distribution. For example, if you received it on 3/9, the conversion contribution to the Roth IRA must be made by 5/8. And if you do not have a Roth IRA open, you will have to open one. Still a tight squeeze if you have to use the funds returned by Ally to fund the conversion.

It might be possible for Ally to immediately move the funds removed from the TIRA into a Roth without actually sending them to you or to your checking. But if they will do this, be sure they understand what you want. If the amount removed from the TIRA is over 40,000 due to earnings, do NOT convert more than 40,000. Let any earnings go to your checking account.

If the amount removed is less than 40,000 due to investment losses or Ally penalties, move enough from your checking account to bring it up to a 40,000 conversion. In other words, gain or loss while with Ally on the 40,000, only convert 40,000 exactly.
The date on the check was 3/5/2021 but i dont remember when i received it.

Anyways i will open a Roth ira account right away and let them transfer 40k. But what to do with the interest earned in traditional ira wrongfully?
water2357
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Re: IRA rollover problem. Please help

Post by water2357 »

If you are doing a ROTH conversion or if you are just getting a distribution, you must pay tax on it as others have said. And if nothing was withheld from the conversion/distribution you need to either up your other withholding or make sure you pay increased estimated tax on time to timely cover the tax on the conversion/distribution. You owe the tax based on when you received/made the conversion/distribution.
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Re: IRA rollover problem. Please help

Post by Alan S. »

The interest you earned in the TIRA on the excess rollover will be taxable and subject to penalty. This entire distribution of 40,000 +/- earnings should go into your checking account and you can use any part of it to complete the 40,000 conversion.

In determining when the 60 day rollover deadline is, add whatever number of days your mail usually takes to arrive to the date shown as the distribution date on your IRA statement. Remember that the mail does not move on Sunday.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Sat Apr 24, 2021 10:30 pm The interest you earned in the TIRA on the excess rollover will be taxable and subject to penalty. This entire distribution of 40,000 +/- earnings should go into your checking account and you can use any part of it to complete the 40,000 conversion.

In determining when the 60 day rollover deadline is, add whatever number of days your mail usually takes to arrive to the date shown as the distribution date on your IRA statement. Remember that the mail does not move on Sunday.
About when the 60 day rule starts, I am just surprised why it is vague. But anyway, I will add 2-3 days to March 5.

About the interest, let's assume the interest that was wrongfully accrued was $100 to simplify. The lower check was $40K. So both are still on the Traditional IRA side. I am not understanding why I can not transfer $40,100 to Roth IRA and pay income tax on it with no penalties? Why do I have to pay penalty on the interest?

Also, Merrill Edge told me when they cut the checks to me, it was coded as "premature distribution" and Ally told me deposits were coded as "60 day rollover". So if I transfer $40,100 to Roth IRA, how will they change the coding on the 2nd check only ($40K) ?
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Sun Apr 25, 2021 9:49 am
Alan S. wrote: Sat Apr 24, 2021 10:30 pm The interest you earned in the TIRA on the excess rollover will be taxable and subject to penalty. This entire distribution of 40,000 +/- earnings should go into your checking account and you can use any part of it to complete the 40,000 conversion.

In determining when the 60 day rollover deadline is, add whatever number of days your mail usually takes to arrive to the date shown as the distribution date on your IRA statement. Remember that the mail does not move on Sunday.
About when the 60 day rule starts, I am just surprised why it is vague. But anyway, I will add 2-3 days to March 5.

About the interest, let's assume the interest that was wrongfully accrued was $100 to simplify. The lower check was $40K. So both are still on the Traditional IRA side. I am not understanding why I can not transfer $40,100 to Roth IRA and pay income tax on it with no penalties? Why do I have to pay penalty on the interest?

Also, Merrill Edge told me when they cut the checks to me, it was coded as "premature distribution" and Ally told me deposits were coded as "60 day rollover". So if I transfer $40,100 to Roth IRA, how will they change the coding on the 2nd check only ($40K) ?
You have to pay income tax and penalty on the gains because the excess amount should not have been rolled into the IRA. Same thing if you make a regular contribution over the limit, you have to remove the excess with the gains and the gains are subject to tax and penalty. You will get a 1099R coded specifically to reflect removal of an excess contribution and the gains will show in Box 2a, the taxable box.

As for the amount converted to Roth, you distributed 40k from the first IRA, and that is the amount you can convert to have a complete rollover. You cannot convert the small gains because the removal of an excess contribution is not eligible for rollover.

As for coding, ML is correct, although they did you no favors if they knew you were going to roll over these distributions by not telling you about the one rollover limit. But there 1099R is correct as indicated. Same with Ally for their Form 5498 contribution coding since at the time they accepted the rollover as they had no idea it was a disallowed rollover. However, the corrective distribution from Ally will produce a 1099R coded as a corrective distribution (Code 8) of 40,000 plus gains. Then when you convert 40,000 to Roth, they will issue another 1099R coded 2 if your Roth is at Ally. Code 2 means no penalty.

So your 2021 tax filing will be complicated by multiple 1099R forms (at least 3). The conversion is reported on Form 8606.

How are you going to fund the conversion, by funds you already have, or do you need to wait for Ally to distribute the excess 40k plus earnings out of the TIRA? As for ordering the corrective distribution from Ally, be sure they understand why the 40k rollover was excess, because if they do not code the distribution correctly to produce the 1099R coded 8 as above, it will cause major problems.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Sun Apr 25, 2021 12:02 pm
Econberkeley wrote: Sun Apr 25, 2021 9:49 am
Alan S. wrote: Sat Apr 24, 2021 10:30 pm The interest you earned in the TIRA on the excess rollover will be taxable and subject to penalty. This entire distribution of 40,000 +/- earnings should go into your checking account and you can use any part of it to complete the 40,000 conversion.

In determining when the 60 day rollover deadline is, add whatever number of days your mail usually takes to arrive to the date shown as the distribution date on your IRA statement. Remember that the mail does not move on Sunday.
About when the 60 day rule starts, I am just surprised why it is vague. But anyway, I will add 2-3 days to March 5.

About the interest, let's assume the interest that was wrongfully accrued was $100 to simplify. The lower check was $40K. So both are still on the Traditional IRA side. I am not understanding why I can not transfer $40,100 to Roth IRA and pay income tax on it with no penalties? Why do I have to pay penalty on the interest?

Also, Merrill Edge told me when they cut the checks to me, it was coded as "premature distribution" and Ally told me deposits were coded as "60 day rollover". So if I transfer $40,100 to Roth IRA, how will they change the coding on the 2nd check only ($40K) ?
You have to pay income tax and penalty on the gains because the excess amount should not have been rolled into the IRA. Same thing if you make a regular contribution over the limit, you have to remove the excess with the gains and the gains are subject to tax and penalty. You will get a 1099R coded specifically to reflect removal of an excess contribution and the gains will show in Box 2a, the taxable box.

As for the amount converted to Roth, you distributed 40k from the first IRA, and that is the amount you can convert to have a complete rollover. You cannot convert the small gains because the removal of an excess contribution is not eligible for rollover.

As for coding, ML is correct, although they did you no favors if they knew you were going to roll over these distributions by not telling you about the one rollover limit. But there 1099R is correct as indicated. Same with Ally for their Form 5498 contribution coding since at the time they accepted the rollover as they had no idea it was a disallowed rollover. However, the corrective distribution from Ally will produce a 1099R coded as a corrective distribution (Code 8) of 40,000 plus gains. Then when you convert 40,000 to Roth, they will issue another 1099R coded 2 if your Roth is at Ally. Code 2 means no penalty.

So your 2021 tax filing will be complicated by multiple 1099R forms (at least 3). The conversion is reported on Form 8606.

How are you going to fund the conversion, by funds you already have, or do you need to wait for Ally to distribute the excess 40k plus earnings out of the TIRA? As for ordering the corrective distribution from Ally, be sure they understand why the 40k rollover was excess, because if they do not code the distribution correctly to produce the 1099R coded 8 as above, it will cause major problems.
When you say funding, do you mean the additional income tax stemmed from $40K conversion from Traditional IRA to Roth IRA? If so, I got enough to cover that.

I understood the part where you said the interest that 40K had earned wrongfully sitting in Traditional IRA account will cause tax penalty and income tax. But that is inly $100 so no big deal.

What I find challenging is how do I explain Ally bank people what to do with 1099 coding.

At first the 2nd check $40K was deposited in Traditional IRA and coded as "60 day rollover" but that was wrong. First 1099R will reflect the coding for Traditional IRA. Then to correct this, they will issue 1099R with code 8 which means they remove or correct the code. Then they issue another 1099R to reflect my deposit to Roth IRA with code 2.

Altogether 3 1099Rs.

I think I understood it, thanks.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

I got a call from Allybank and they are telling me that conversion to Roth IRA is not possible

They also said their IRA department entered the 2 checks in such an order that I can not get the lower check to be distributed

It has to be the big check that I have to get distribution on which means I will pay 10% of $342K as tax penalty. I opposed it and I told them to find a solution. This problem is now escalated to manager and I am waiting for a call from them.
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Re: IRA rollover problem. Please help

Post by Alan S. »

Econberkeley wrote: Tue Apr 27, 2021 5:57 pm I got a call from Allybank and they are telling me that conversion to Roth IRA is not possible

They also said their IRA department entered the 2 checks in such an order that I can not get the lower check to be distributed

It has to be the big check that I have to get distribution on which means I will pay 10% of $342K as tax penalty. I opposed it and I told them to find a solution. This problem is now escalated to manager and I am waiting for a call from them.
Very bad news. Options for a decent outcome are about gone. However, please advise what you sent to Ally. Did you send the two ML checks endorsed over to Ally? Do you have a checking account at Ally, and if so can you tell if these checks were ever deposited in the checking account before the actual IRA was funded?

Finally, can you tell if the IRA was totally funded on the same day? What I am fishing for is some evidence that the two checks lost their individual identity due to running them through the checking account. If so, you might be able to make the case that the first 342,000 rolled over could be traced back to the large ML check, that this amount is the allowed rollover, and only the last 40,000 is an excess contribution traced back to the small ML check.

Now Ally is technically correct that the first distribution rolled over is the valid one, and the second is the excess amount, but if these people are so dang smart, why did they deposit both the full amount in the first place? They should have alerted you to the one rollover limit before accepting any rollover contributions, and suspended the process until you got back to them.

Also, with respect to the conversion, perhaps they want to clearly identify how large the excess amount is before you convert. If you had to convert 342,000 that would result in a massive tax bill, but so would treating the 342,000 as an excess contribution. If that occurred you would owe both tax and penalty on the 342,000.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Tue Apr 27, 2021 7:19 pm
Econberkeley wrote: Tue Apr 27, 2021 5:57 pm I got a call from Allybank and they are telling me that conversion to Roth IRA is not possible

They also said their IRA department entered the 2 checks in such an order that I can not get the lower check to be distributed

It has to be the big check that I have to get distribution on which means I will pay 10% of $342K as tax penalty. I opposed it and I told them to find a solution. This problem is now escalated to manager and I am waiting for a call from them.
Very bad news. Options for a decent outcome are about gone. However, please advise what you sent to Ally. Did you send the two ML checks endorsed over to Ally? Do you have a checking account at Ally, and if so can you tell if these checks were ever deposited in the checking account before the actual IRA was funded?

I sent 2 checks Ally and the checks were made out to me. I have a checking account in Ally but these 2 checks were deposited in Traditional IRA account and still there.

Finally, can you tell if the IRA was totally funded on the same day? What I am fishing for is some evidence that the two checks lost their individual identity due to running them through the checking account. If so, you might be able to make the case that the first 342,000 rolled over could be traced back to the large ML check, that this amount is the allowed rollover, and only the last 40,000 is an excess contribution traced back to the small ML check.

Both checks were deposited the same day. But customer service told me the small amount 40K was deposited first according to their records. That is where I insisted that there is no way for me to control this and I should be able to choose the lower of the checks to be distributed and large check to be rolledover. First she insisted that 342K should be distributed then she said she will escalate this issue to manager.

Now Ally is technically correct that the first distribution rolled over is the valid one, and the second is the excess amount, but if these people are so dang smart, why did they deposit both the full amount in the first place? They should have alerted you to the one rollover limit before accepting any rollover contributions, and suspended the process until you got back to them.

I agree wholeheartedly and this will be my argument when manager calls me tomorrow

Also, with respect to the conversion, perhaps they want to clearly identify how large the excess amount is before you convert. If you had to convert 342,000 that would result in a massive tax bill, but so would treating the 342,000 as an excess contribution. If that occurred you would owe both tax and penalty on the 342,000.
That is a possible outcome. That means I have to pay 34K as penalty and 342K will be added to my income. I wonder if I should get a tax attorney to fight for me

Another question comes to mind is what if I do not sign the papers for distribution of $340K? Then the money stays up in the air? Because they can not move funds without my signature.
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Here are my thoughts, and perhaps Alan can comment. 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.

Also, as far as I know, an IRA custodian cannot make a distribution without a request from the IRA owner, and as far as I know Allybank does not provide tax advice. So I might be inclined to just request a distribution of $40K as an excess contribution and inform the bank that you believe the larger rollover is valid.

If Allybank won't allow the $40K to be converted to a Roth, you could do the conversion with another custodian.

I think this might work, but you may want to obtain a second opinion.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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.

Also, as far as I know, an IRA custodian cannot make a distribution without a request from the IRA owner, and as far as I know Allybank does not provide tax advice. So I might be inclined to just request a distribution of $40K as an excess contribution and inform the bank that you believe the larger rollover is valid.

If Allybank won't allow the $40K to be converted to a Roth, you could do the conversion with another custodian.

I think this might work, but you may want to obtain a second opinion.
How would I do a conversion with a different firm? Call Ally bank and tell them to make a trustee to trustee transfer to X brokerage firm for the small check? Both checks were cut on march 5 but i dont know when i received them. I guess i have time?
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

Do you have a 401k? Can you just take back the excess contribution (whichever check Ally ends up willing to give back) and roll it into your 401k? ==> no tax or penalty

otw you will have to take the check and redeposit it into a Roth IRA ==> tax but no penalty

if you just keep the check in your checking account ==> tax + 10% penalty

finally, if you don't take the check out as excess contribution ==> 6% penalty every year from now on!
Alan S.
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Re: IRA rollover problem. Please help

Post by Alan S. »

MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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.

Also, as far as I know, an IRA custodian cannot make a distribution without a request from the IRA owner, and as far as I know Allybank does not provide tax advice. So I might be inclined to just request a distribution of $40K as an excess contribution and inform the bank that you believe the larger rollover is valid.

If Allybank won't allow the $40K to be converted to a Roth, you could do the conversion with another custodian.

I think this might work, but you may want to obtain a second opinion.
Mark, if Ally states that the 40k distribution was deposited first (perhaps even on the same day as the second distribution), then this is the allowed rollover if they are using the actual checks. As such it could not be considered an excess contribution. Only the second distribution rolled over would be the excess one. My assumption is that the taxpayer does not get to choose which rollover violated the one rollover limit.

That said, if the entire total distributions were first deposited in a checking account, then they lose their identity and Ally should then be willing to treat the first 40k rolled over as a portion of the larger distribution, allowing the entire larger distribution to be rolled over, with the last 40k being treated as the excess amount. Trying to explain this to Ally and their chance of understanding it or agreeing are probably very slim.
MarkNYC
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Alan S. wrote: Wed Apr 28, 2021 12:49 pm
MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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 Ally states that the 40k distribution was deposited first (perhaps even on the same day as the second distribution), then this is the allowed rollover if they are using the actual checks. As such it could not be considered an excess contribution. Only the second distribution rolled over would be the excess one. My assumption is that the taxpayer does not get to choose which rollover violated the one rollover limit.
Alan -- I am not yet convinced. The law does not say that an indirect rollover (60-day) will be disallowed if there was another indirect rollover during the prior 12 months. It says that an indirect rollover will be disallowed if, during the prior 12 months, another IRA distribution was "not includible in gross income" because it was included in a tax-free indirect rollover. This determination cannot be known until the tax return is filed for the year that includes the rollover(s).

So let's say there were 4 indirect rollovers during a 12 months period (assume calendar year). 3 of those would be disallowed and would be excess contributions, but I don't see anything in the law that says the first chronological rollover must be the one that will be allowed. If all 4 were excluded from income on the tax return due to the rollovers, I can see where mechanically the first rollover is the one allowed. But if any 3 of the 4 rollovers are "returned" and included in income, I don't see why the 4th should not be an allowed rollover, regardless of where it fits in the sequence of the 4 rollovers.
Last edited by MarkNYC on Wed Apr 28, 2021 8:37 pm, edited 1 time in total.
RubyTuesday
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Re: IRA rollover problem. Please help

Post by RubyTuesday »

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)?
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

gobel wrote: Wed Apr 28, 2021 10:57 am Do you have a 401k? Can you just take back the excess contribution (whichever check Ally ends up willing to give back) and roll it into your 401k? ==> no tax or penalty

otw you will have to take the check and redeposit it into a Roth IRA ==> tax but no penalty

if you just keep the check in your checking account ==> tax + 10% penalty

finally, if you don't take the check out as excess contribution ==> 6% penalty every year from now on!
I do not have 401k anymore. I converted into Traditional IRA some years ago

I can not take the check now because it is in the process who knows what in Allybank. They know I want the small check to be distributed. They already rejected my request small check to be converted to Roth.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

Alan S. wrote: Wed Apr 28, 2021 12:49 pm
MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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.

Also, as far as I know, an IRA custodian cannot make a distribution without a request from the IRA owner, and as far as I know Allybank does not provide tax advice. So I might be inclined to just request a distribution of $40K as an excess contribution and inform the bank that you believe the larger rollover is valid.

If Allybank won't allow the $40K to be converted to a Roth, you could do the conversion with another custodian.

I think this might work, but you may want to obtain a second opinion.
Mark, if Ally states that the 40k distribution was deposited first (perhaps even on the same day as the second distribution), then this is the allowed rollover if they are using the actual checks. As such it could not be considered an excess contribution. Only the second distribution rolled over would be the excess one. My assumption is that the taxpayer does not get to choose which rollover violated the one rollover limit.

That said, if the entire total distributions were first deposited in a checking account, then they lose their identity and Ally should then be willing to treat the first 40k rolled over as a portion of the larger distribution, allowing the entire larger distribution to be rolled over, with the last 40k being treated as the excess amount. Trying to explain this to Ally and their chance of understanding it or agreeing are probably very slim.
I am hoping that you are not right and that Ally will somehow switch the large check to be 1st. Alan said earlier that 1099R code 8 is a removal code. Hopefully they will do that. If not, I will be in big trouble. 10% of 342K as penalty and then taxes on 342K.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

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?
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

Econberkeley wrote: Wed Apr 28, 2021 9:46 pm
gobel wrote: Wed Apr 28, 2021 10:57 am Do you have a 401k? Can you just take back the excess contribution (whichever check Ally ends up willing to give back) and roll it into your 401k? ==> no tax or penalty

otw you will have to take the check and redeposit it into a Roth IRA ==> tax but no penalty

if you just keep the check in your checking account ==> tax + 10% penalty

finally, if you don't take the check out as excess contribution ==> 6% penalty every year from now on!
I do not have 401k anymore. I converted into Traditional IRA some years ago

I can not take the check now because it is in the process who knows what in Allybank. They know I want the small check to be distributed. They already rejected my request small check to be converted to Roth.
Do you mean your current job doesn't have a 401k? Even if different from the original 401k where these funds started from, you may be able to roll an IRA into your current 401k. So if you can get the money returned by Ally (either first or second amount), you can quickly send it to your current 401k. (I think an indirect IRA->401k rollover does not count in the one-per-year limit)
Econberkeley wrote: Wed Apr 28, 2021 9:49 pm I am hoping that you are not right and that Ally will somehow switch the large check to be 1st. Alan said earlier that 1099R code 8 is a removal code. Hopefully they will do that. If not, I will be in big trouble. 10% of 342K as penalty and then taxes on 342K.
A small consolation, but you will not have to pay the 10% penalty if you open a Roth and put the returned funds there. That would just be a IRA->Roth conversion which definitely is not limited by the one-per-year rule. (taxes will be huge though)
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

gobel wrote: Wed Apr 28, 2021 10:25 pm
Econberkeley wrote: Wed Apr 28, 2021 9:46 pm
gobel wrote: Wed Apr 28, 2021 10:57 am Do you have a 401k? Can you just take back the excess contribution (whichever check Ally ends up willing to give back) and roll it into your 401k? ==> no tax or penalty

otw you will have to take the check and redeposit it into a Roth IRA ==> tax but no penalty

if you just keep the check in your checking account ==> tax + 10% penalty

finally, if you don't take the check out as excess contribution ==> 6% penalty every year from now on!
I do not have 401k anymore. I converted into Traditional IRA some years ago

I can not take the check now because it is in the process who knows what in Allybank. They know I want the small check to be distributed. They already rejected my request small check to be converted to Roth.
Do you mean your current job doesn't have a 401k? Even if different from the original 401k where these funds started from, you may be able to roll an IRA into your current 401k. So if you can get the money returned by Ally (either first or second amount), you can quickly send it to your current 401k. (I think an indirect IRA->401k rollover does not count in the one-per-year limit)

I do not have a day time job I am self employed. So no 401k.
Econberkeley wrote: Wed Apr 28, 2021 9:49 pm I am hoping that you are not right and that Ally will somehow switch the large check to be 1st. Alan said earlier that 1099R code 8 is a removal code. Hopefully they will do that. If not, I will be in big trouble. 10% of 342K as penalty and then taxes on 342K.
A small consolation, but you will not have to pay the 10% penalty if you open a Roth and put the returned funds there. That would just be a IRA->Roth conversion which definitely is not limited by the one-per-year rule. (taxes will be huge though)
Ally rejected Roth IRA conversion. They still did not get back to me. Called yesterday and same customer service rep kinda scolded me saying "don't keep calling just wait. Someone will call you." Of course you are not the one ending up paying $34K penalty. :(

I am wondering if I should get a tax attorney to represent me. But giving how much they will charge, I am not sure if it is a good idea.

I understand it is my fault that I sent 2 checks. But then why is there no fudiciary responsibility on Merrill Lynch or Ally Bank side. None of the people I talked to ever mentioned this once per year rule to me.

Also, Ally made a mistake of making 2 rollovers at the same time. How come they don't take responsibility and make me pay all these fines? How do I argue or prove my point without an attorney or court presentation?
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

Yes, if we are talking about taxes on a 342k mistake, a professional would probably be worth it.

btw, still following up on the 401k idea, I have seen threads here of people who opened a "solo 401k" and then rolled their IRA into it (their purpose was to enable backdoor roths, but in your case it would be to avoid being taxed on a 342k withdrawal or conversion). I don't know if you qualify for one (ie is simply being self-emp'd enough?), what the process is or how long it takes, or whether it even solves the problem in this case. Maybe someone else here knows?

Here's a recent thread mentioning it, but there are probably longer ones. viewtopic.php?f=1&t=347064
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

gobel wrote: Thu Apr 29, 2021 9:40 am Yes, if we are talking about taxes on a 342k mistake, a professional would probably be worth it.

btw, still following up on the 401k idea, I have seen threads here of people who opened a "solo 401k" and then rolled their IRA into it (their purpose was to enable backdoor roths, but in your case it would be to avoid being taxed on a 342k withdrawal or conversion). I don't know if you qualify for one (ie is simply being self-emp'd enough?), what the process is or how long it takes, or whether it even solves the problem in this case. Maybe someone else here knows?

Here's a recent thread mentioning it, but there are probably longer ones. viewtopic.php?f=1&t=347064
I hear what you are saying but 60 days is over around May 5.

Besides Allybank is not sure what to do with the 2nd check. Distribution is something i dont want. But then can the 2nd check for $342k be converted to roth ira? I mean i dont know if conversion to roth ira would be violated here. Solo 401k is not something allybank does. Transferring will take time. We dont have much time left.

I am praying that they will let me convert the 2nd check of $342k to roth ira. At least no penalties there.
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celia
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Re: IRA rollover problem. Please help

Post by celia »

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 also was thinking of removing both amounts and even putting them back where they originated. But that doesn’t solve the problem either because the OP apparently asked for 2 checks to be made out to them, which creates two indirect rollovers. The IRS is apparently cracking down on people withdrawing from their IRA to use the money as a short-term loan or buying a “toy” then writing a check(s) to put the money back. Hence, we now have a limit of taking an indirect rollover only once every 365 days.

To me, the problem was that two indirect rollover checks were requested. OP, do you have proof of the order in which you requested them?
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celia
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Re: IRA rollover problem. Please help

Post by celia »

Econberkeley wrote: Thu Apr 29, 2021 12:32 pm I am praying that they will let me convert the 2nd check of $342k to roth ira. At least no penalties there.
You are free to do a Roth conversion any time but that doesn’t solve the problem of two indirect rollovers unless you first get an acknowledgement (assurance now) that any withdrawal will be coded as “Removal of Excess Contribution”.

If you can’t afford the taxes on a $342K Roth Conversion, you could withhold for taxes but the withholding will also be taxed. In addition, if you are under 59.5, there will be a 10% penalty on the early IRA withdrawal (for tax withholding). So you might want to run your numbers now while you are waiting for Ally and calculate how much to withhold for taxes. (My observation/philosophy is that if you take time to prepare for something, it often is not needed. But if you don’t prepare, then the worst will happen.)
Last edited by celia on Thu Apr 29, 2021 1:22 pm, edited 2 times in total.
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gobel
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Re: IRA rollover problem. Please help

Post by gobel »

I did a search and found some interesting articles. Example 14 of https://www.thetaxadviser.com/issues/20 ... -iras.html is close to your situation. They suggest removing the money into a Roth using a trustee-to-trustee xfer. Ie just open a Roth at Ally and have them move the funds. (You said they wouldn't, but did you mean they wouldn't move the smaller check since they feel the bigger check is the one in violation? It doesn't make sense that they are unwilling to do either one?)

Here's another even more interesting article https://www.fiscalwisdom.com/resources/ ... disasters/. Read the section about halfway down titled "Possible Fixes". It gives both solutions we have been talking about here, using a 401k or Roth! (If it were me and 100k+ taxes were on the line, I would be going all out to try to investigate the solo 401k solution to see if it would actually work. Maybe you can IM one of the other threads' OPs to understand more about how they work - or consult a professional of course.) otoh if Ally decides that returning 40k is possible after all, then probably the Roth is good enough.

Finally, about the May 5 deadline to get this all straightened out, I found this article from the IRS https://www.irs.gov/pub/irs-drop/rp-16-47.pdf which outlines how to self-certify for an extension. Exception (c) is "the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan" which sounds pretty close, but I have no experience in the matter. Maybe AlanS or bsteiner who sometimes comments on these things has some insight into whether this qualifies.
MarkNYC
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Re: IRA rollover problem. Please help

Post by MarkNYC »

MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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.
Econberkeley,

I am not sure how you intend to proceed, but I will pass this along FWIW. Earlier today I presented your situation to a colleague who is a tax attorney and CPA who spends much of his time researching complicated income tax issues. He tends to agree with my conclusion above that (1) if the $40K IRA distribution from ME is treated as fully taxable, and (2) the $40K rollover contribution to Ally is returned as an excess contribution, then the $40K "rollover" deposit to Ally does not meet the definition of a tax-free rollover as defined in Sec. 408(d)(3)(B) that would prohibit an actual tax-free rollover over the following 12 months. Meaning the $342K tax-free rollover should be allowed.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

MarkNYC wrote: Thu Apr 29, 2021 6:01 pm
MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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.
Econberkeley,

I am not sure how you intend to proceed, but I will pass this along FWIW. Earlier today I presented your situation to a colleague who is a tax attorney and CPA who spends much of his time researching complicated income tax issues. He tends to agree with my conclusion above that (1) if the $40K IRA distribution from ME is treated as fully taxable, and (2) the $40K rollover contribution to Ally is returned as an excess contribution, then the $40K "rollover" deposit to Ally does not meet the definition of a tax-free rollover as defined in Sec. 408(d)(3)(B) that would prohibit an actual tax-free rollover over the following 12 months. Meaning the $342K tax-free rollover should be allowed.
Thanks for your input

Allybank told me that 46k is the first check that is deposited although 2 checks were in the same envelope they somehow chosen the small check to deposit first and so small check of $40k will be rolled over.

I tried to explain to them that this was not my decision and that some back office analyst chose to deposit the $40K check as first and then 342K check as 2nd deposit.

But they said they can not undo this. So this leaves me 2 options. 2nd check of $342k will be either distributed to me as cash or it has to be converted to ROTH IRA. The problem is I have been waiting for days for them to call me. Deadline is approaching and they are taking this slow.

Either way I have to pay alot of taxes and/or penalties. The question is would a tax attorney help me convince Allybank to shift checks and make 342K to be the first and 40K to be 2nd? I need a tax attorney I think. I PM'ed you.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

celia wrote: Thu Apr 29, 2021 12:45 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 also was thinking of removing both amounts and even putting them back where they originated. But that doesn’t solve the problem either because the OP apparently asked for 2 checks to be made out to them, which creates two indirect rollovers. The IRS is apparently cracking down on people withdrawing from their IRA to use the money as a short-term loan or buying a “toy” then writing a check(s) to put the money back. Hence, we now have a limit of taking an indirect rollover only once every 365 days.

To me, the problem was that two indirect rollover checks were requested. OP, do you have proof of the order in which you requested them?
No I dont have a proof. I called ME and told them over the phone.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

gobel wrote: Thu Apr 29, 2021 1:14 pm I did a search and found some interesting articles. Example 14 of https://www.thetaxadviser.com/issues/20 ... -iras.html is close to your situation. They suggest removing the money into a Roth using a trustee-to-trustee xfer. Ie just open a Roth at Ally and have them move the funds. (You said they wouldn't, but did you mean they wouldn't move the smaller check since they feel the bigger check is the one in violation? It doesn't make sense that they are unwilling to do either one?)

Here's another even more interesting article https://www.fiscalwisdom.com/resources/ ... disasters/. Read the section about halfway down titled "Possible Fixes". It gives both solutions we have been talking about here, using a 401k or Roth! (If it were me and 100k+ taxes were on the line, I would be going all out to try to investigate the solo 401k solution to see if it would actually work. Maybe you can IM one of the other threads' OPs to understand more about how they work - or consult a professional of course.) otoh if Ally decides that returning 40k is possible after all, then probably the Roth is good enough.

Finally, about the May 5 deadline to get this all straightened out, I found this article from the IRS https://www.irs.gov/pub/irs-drop/rp-16-47.pdf which outlines how to self-certify for an extension. Exception (c) is "the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan" which sounds pretty close, but I have no experience in the matter. Maybe AlanS or bsteiner who sometimes comments on these things has some insight into whether this qualifies.
Thanks gobel. I gazed around the links and it seems like I need to get a tax attorney to help me. Self-certify is something that gives me hope.

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.

I know these are unusual questions. Tomorrow I am calling a few tax attorneys.
MarkNYC
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Re: IRA rollover problem. Please help

Post by MarkNYC »

Econberkeley wrote: Thu Apr 29, 2021 8:17 pm
MarkNYC wrote: Thu Apr 29, 2021 6:01 pm
MarkNYC wrote: Tue Apr 27, 2021 11:24 pm Here are my thoughts, and perhaps Alan can comment. 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.
Econberkeley,

I am not sure how you intend to proceed, but I will pass this along FWIW. Earlier today I presented your situation to a colleague who is a tax attorney and CPA who spends much of his time researching complicated income tax issues. He tends to agree with my conclusion above that (1) if the $40K IRA distribution from ME is treated as fully taxable, and (2) the $40K rollover contribution to Ally is returned as an excess contribution, then the $40K "rollover" deposit to Ally does not meet the definition of a tax-free rollover as defined in Sec. 408(d)(3)(B) that would prohibit an actual tax-free rollover over the following 12 months. Meaning the $342K tax-free rollover should be allowed.
Thanks for your input

Allybank told me that 46k is the first check that is deposited although 2 checks were in the same envelope they somehow chosen the small check to deposit first and so small check of $40k will be rolled over.

I tried to explain to them that this was not my decision and that some back office analyst chose to deposit the $40K check as first and then 342K check as 2nd deposit.

But they said they can not undo this. So this leaves me 2 options. 2nd check of $342k will be either distributed to me as cash or it has to be converted to ROTH IRA. The problem is I have been waiting for days for them to call me. Deadline is approaching and they are taking this slow.

Either way I have to pay alot of taxes and/or penalties. The question is would a tax attorney help me convince Allybank to shift checks and make 342K to be the first and 40K to be 2nd? I need a tax attorney I think. I PM'ed you.
The primary legal argument would be that it doesn't matter which check got deposited first. If the $40K distribution from ME that was rolled over is (1) treated as taxable income and (2) withdrawn as an excess contribution, then it would not constitute a tax-free rollover that prohibits the $342K rollover that followed.

Whether the bank has liability for negligent actions that cause you significant financial harm is a separate legal question.

I think there is enough at stake that consulting a tax attorney familiar with IRA issues would be worthwhile, but that is a personal decision for you to make.
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Econberkeley
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Re: IRA rollover problem. Please help

Post by Econberkeley »

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.
cas
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Re: IRA rollover problem. Please help

Post by cas »

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.
There haven't been income limitations on Roth IRA conversions since 2010.

Google can confirm with a "Roth conversion 2010" search. e.g. from Vanguard: The rules for Roth conversions are changing in 2010
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