60 day in kind distribution from an IRA
I have a client who took a loan of two equity positions from his IRA to satisfy a margin call in his regular account. Now it is time to move the positions back to the IRA but one of the equities has fallen to half it’s value. This was an in kind distribution & the exact same shares are going back into the IRA. My IRA dept is telling me the difference in the value is considered a taxable distribution. My understanding is since it was in kind it has to go back the same as it came out which means & there would not be any taxable situation. Can anyone clarify for me?
Permalink Submitted by Alan Spross on Wed, 2007-09-12 22:54
They are probably correct. IRS reporting instructions for Form 5498 Rollover Contributions indicates,
“For the rollover of property, enter the FMV of the property on the date you receive it. This value may be different from the value of the property on the date it was distributed to the participant.”
I guess that means to complete this as a tax free rollover, additional shares would have to be purchased to make up for the price decline. Of course, there are also the 60 day time requirement and the one rollover per 12 month requirement that apply to this transaction.
Permalink Submitted by Denise Appleby on Thu, 2007-09-13 14:18
The client may be able to [url=http://www.retirementdictionary.com/Rollover-Contribution.htm%5Drollover%5B/… the same number of shares and be OK.
[quote=”[email protected]“] IRS reporting instructions for Form 5498 Rollover Contributions indicates,
“For the rollover of property, enter the [url=http://www.retirementdictionary.com/Fair-Market-Value.htm%5DFMV%5B/url%5D of the property on the date you receive it. This value may be different from the value of the property on the date it was distributed to the participant.” [/quote]
These particular set of instructions does appear to be the key. Look at the instructions from the perspective of the [url=http://www.retirementdictionary.com/IRA.htm%5DIRA%5B/url%5D custodian, which is the party to whom the instructions are directed. The custodian should not be concerned with the value of the property when it was distributed, only when it is deposited to the account for which they are custodian.
Let’s look at it from another perspective…assume the client did not want to wait the usual period for a trustee-to-trustee transfer to be completed and opted to do a distribution instead. The issuing custodian distributes 100 shares of XYZ stock to the participant, who in turn took the 100-shares to the receiving custodian with instructions to deposit to his IRA. During that period, the value of the stock fell by 50%. This decrease in value does not change the fact that the rollover of that 100 shares represents a 100% rollover of the distribution.
My opinion….The key is the definition of ‘property’ . In this case, the property is 100 shares of XYZ stock. Similar to how one would describe 100 acre of land, one house etc. the value of the property may change, but the actual item remains the same.
PS: Even though you used the term ‘loan’, we understand that you mean the client took a [url=http://www.retirementdictionary.com/Distribution.htm%5Ddistribution%5B/url%5D and now wants to rollover the amount within 60-days. Just clarifying for anyone who is new to the field and checks these boards.
Permalink Submitted by Ryan Smith on Thu, 2007-09-13 15:36
Thank you both for posting a reply.
I was thinking it would be similar to an in-kind rollover from an employer plan. In my area AEP is a large employer & I have completed in kind rollovers for AEP stock in the past. With Fidelity this could take up to 3 weeks and the value of the stock would most likely have moved one way or the other. This has never caused a taxable issue in the past so I don’t see why this situation would be any different.
ps. If the stock had gone up by 50%, how would they have classified the additional value when it was returned to the IRA?
Permalink Submitted by Alan Spross on Thu, 2007-09-13 21:20
I think Denise is agreeing that the rollover of shares is NOT taxable despite the 5498 instructions.
It is also clear that Sec 402(c)(1) covers your analagous situation when the funds originated from an exempt trust such as most employer plans. In this section there is a paragraph dealing only with “other property”, and it does not refer to amounts, but to rollovers of that same property. Accordingly, no problem with taxable income on employer transfers or rollovers.
However, my concern is that Sec 408(d)(3) which deals with IRA to IRA rollovers refers only to “amounts” and does not contain the same wording regarding “other property” as Sec 402 does.
Not sure if this is significant or not – Denise, what do you think?
Permalink Submitted by Denise Appleby on Fri, 2007-09-14 18:34
Hi Alan,
I agree that the shares are not taxable.
What do you think about the phrase “the entire amount received (including money and any other property)” in (i) and (ii) of § 408(d)(3). It seems to address the issue of the ‘same amount of property ‘ being rolled over.
I tried to find a case that addressed rollovers of property- when property is distributed, but the only one I could find was 110 T.C. No. 11 Lemishow Vs Commissioner , which addressed distribution of cash and rollover of property, resulting in the rollover being ineligible/taxable. A copy is at http://www.retirementdictionary.com/Rollover-Contribution.htm