60-Day Rollover Handled Incorrectly

Submitted by Eric Levenhagen on Fri, 2017-12-29 21:40

A client and his wife are in a mess. Went to their advisor and withdrew money from 401k accounts, planning to do a 60-day rollover. Withdrawals were made in September 2017. Money was deposited again within the 60-day window, but when advisor went to re-deposit money flags went off in their software that the money would be taxable. There are two issues:

The wife’s funds ended up coming from two accounts, a 401k and a SIMPLE account. 60-day rollovers can only come from one account, so one of these distributions are now taxable. She will get a 1099-R for $30,000.

The husband’s funds also came from two accounts. Worse – he withdrew funds last year and did the 60-day rollover in December 2016. So he attempted two rollovers in less than a one-year period and now his entire distribution of $327,000 is taxable.

Right now the money (now taxable) is sitting back in the original 401k accounts.

Is there a way to rectify this now so they don’t get hit with a huge tax bill?
Should the taxable contributions and related earnings be removed from the 401k accounts?



Submitted by Ben Meyer on Fri, 2017-12-29 21:59

  • The one-rollover-per-year rule only applies on rollovers between IRA-type accounts at both ends of the rollover.  Rollovers from 401(k) to IRAs don’t count in the rule.  So if one or both of the husband’s accounts was a 401(k), it could be a similar situation.to the wife’s, depending on the source and destination of the rollover in December 2016.
  • What type of software gave the flags or alerts?


Submitted by Eric Levenhagen on Tue, 2018-01-02 23:19

  • Both of the rollovers were ultimately from the IRA they use for their SIMPLE. The original source of the funds was their 401k, so I the way I understand it the advisor transferred from the 401k to the IRA, then withdrew from IRA’s to get money into client’s hands – hopefully, positioned for the 60-day rollover.
  • The software was whatever Edward Jones reps use.


Submitted by Alan - IRA critic on Wed, 2018-01-03 00:47

  • There is no easy solution to this problem, but first we need to actually understand the problem. Note that an account can be a 401k account, a SIMPLE 401k account (these are rare), or a SIMPLE IRA. Further, a SIMPLE IRA account cannot have received a rollover from a 401k account prior to 12/18/2015 or prior to 2 years from the first SIMPLE IRA contribution to the SIMPLE IRA. You are also referring to an “IRA they use for their SIMPLE” as if they jointly own the account. That cannot be the case for a SIMPLE IRA. So client or advisor needs to clarify exactly what these accounts are for each spouse, and the date of each distribution that was rolled over.
  • So a 401k rollover into a SIMPLE IRA could have occurred after 12/2015 and been OK if the SIMPLE IRA was at least 2 years old. If so, that is no longer 401k money, but SIMPLE IRA money, and subject to the one rollover limitation per 12 month period. These rules apply separately for each spouse.
  • While a huge taxable amount not eligible for rollover is bad enough, if the amount came from a SIMPLE IRA before the 2 year waiting period and owner was under 59.5, there is also a 25% early withdrawal penalty instead of the usual 10%, and the 1099R will be coded to show that.
  • So yes, this is very complex and involves considerable detail. 

 



Submitted by Eric Levenhagen on Wed, 2018-01-03 20:45

Thanks for your replies. I apologize for being too vague before. I have received additional information from the advisor that I hope will help:

  • Husband and wife each have an individual 401k account [referred to below as 401k], a grandfathered SIMPLE IRA account that has been open for many years [referred to below as SIMPLE account], and a newer IRA that is over 2 years old [referred to below as NEW SIMPLE]. 
  • Husband’s scenario: Advisor rolled over funds in September 2017 from 401k to NEW SIMPLE account – as the old SIMPLE cannot receive any contributions – and Husband immediately took a distribution of those funds from the NEW SIMPLE. Husband also took a distribution from the old SIMPLE account. All funds were redeposited into the NEW SIMPLE account within 60 days. But since husband had already done a 60-day rollover in October 2016, both of these distributions are now deemed taxable.
  • Wife’s scenario is very similar: Advisor rolled over funds in September 2017 from 401k to NEW SIMPLE account – as the old SIMPLE cannot receive any contributions – and Wife immediately took a distribution of those funds from the NEW SIMPLE. Wife also took a distribution from the old SIMPLE account. All funds were redeposited into the NEW SIMPLE account within 60 days. Wife has not done a 60-day rollover prior to this so one of her distributions is being coded as nontaxable. The other is being coded as taxable because of the rule that the funds for a 60-day rollover can only come from one account.

Hopefully, now the problem is more clear. Please let me know if I am missing additional relevant information. Is there anything that can be done to unravel this or mitigate the tax consequences? 



Submitted by Alan - IRA critic on Wed, 2018-01-03 22:15

  • OK, that is much clearer, but still a bleak situation because there is no procedure for the IRS to waive the one rollover rule as there is for extending the 60 days to complete a rollover. Obviously, they should have been doing direct transfers instead of 60 day rollovers, but perhaps they were using the funds temporarily. One thing to investigate is the husband’s 2016 rollover. The one year limitation is measured from the date of distribution, not from the date of the rollover contribution. Therefore, if husband took the 2016 distribution one year or more prior to the next  distribution he took from either SIMPLE in Sept that he rolled over, then the first distribution he took in 2017 was allowed to be rolled over.
  • I take it that the staff who coded these rollovers only acted after other staff had accepted the rollovers without warning the clients.
  • There is also the matter of the excess IRA contributions from the ineligible rollovers that will incur 6% excise taxes for 2017 unless corrected.

 



Submitted by Ben Meyer on Thu, 2018-01-04 02:23

In the original posting it was stated that “Right now the money (now taxable) is sitting back in the original 401k accounts”, but then a clarification was made that the funds are now in SIMPLE IRA accounts for husband & wife.  At this point would it be possible to actually deposit the funds back into the original 401(k) accounts, assuming that they are still open, that the plans will accept the rollovers, and that the funds are all pretax.  A waiver would be needed for exceeding the 60 day rollover rule under RP 16-47, with a claim of an error committed by the financial institution.  The funds would be withdrawn from the SIMPLE accounts as distributions of excess contributions.  For husband the total would be rolled to 401(k).  For wife only the later of the two SIMPLE distributions would be rolled to 401(k).  The second stage of rollovers would then be from SIMPLE to 401(k) and not from SIMPLE to SIMPLE, so the one-rollover-per-year rule would not be violated.  Is this a workable solution?



Submitted by Alan - IRA critic on Thu, 2018-01-04 02:52

Benn, did you catch that the OP completely amended the first post?



Submitted by Ben Meyer on Thu, 2018-01-04 03:18

Yes – but it is useful to look at each transaction to see where the prohibited rollovers occur.  For husband, according to the amended description, the initial 401(k) to New SIMPLE rollover is ok.  But the distributions from new & old SIMPLE are not rollover eligible. Thus the rollover deposit of the combined amount to new SIMPLE is an excess contribution.  The question is whether the contribution to new SIMPLE can be removed and then rolled into the 401(k), assuming the 401(k) is still open and permitted by the 401(k) plan, with a time waiver under RP 16-47  This way it could end up with the original 401(k) funds back in the 401(k) plus the distribution from the old SIMPLE account.  Each completed rollover would then be from 401(k) to SIMPLE, or from SIMPLE to 401(k), neither of which have a one-per-year restriction.  The question is whether RP 16-47 can be applied in such a situation as this.



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