IRS Can't Give You a Break If You Violate Once-Per-Year-Rollover Rule
By Joe Cicchinelli, IRA Technical Expert
Follow on Twitter: @JoeCiccEdSlott
In a recent private letter ruling (PLR 201440028), the IRS couldn’t give someone who violated the once-per-year rollover rule a break, even though it wasn’t his fault. The individual had an IRA and wanted to invest some of it with a different entity as part of his financial plan. The PLR didn’t say exactly what type of investment he was trying to make, but it was probably a non-conventional IRA investment such as a limited partnership, LLC, non-publicly traded stock, etc. The problem was the entity he was trying to invest his IRA money with wrongly told him that it was a financial institution that was qualified to be an IRA custodian.
Based on that wrong information, he directly transferred some IRA money in March and September of 2011 to what he thought was another IRA. As it turned out, the entity contacted him, after 60-days from both of the transfers, and told him they made a mistake and that they weren’t qualified to serve as an IRA custodian. At this point, the transfers were in fact IRA distributions that were now subject to the IRA 60-day rollover rule and the once-per-year rule. The individual didn’t want to pay taxes on these two IRA distributions because of the entity’s mistakes, so he applied to the IRS for a waiver of the 60-day rollover rule and asked for more time to do the rollovers.
The good news it the IRS approved a waiver of the 60-day rule for the first (March 2011) IRA distribution due to the entity’s errors. However, the IRS denied the waiver for the September 2011 IRA distribution because of the one-rollover-per-year rule.
The problem was that the September 2011 distribution was the second IRA distribution within one year (365 days) that he was trying to roll over. You are only allowed to roll over one distribution within a one-year period. So while IRS allowed him to roll over the March 2011 distribution, he was not eligible to do any more rollovers until a year had passed from the date he received those funds.
The result was that the September 2011 distribution was not eligible for rollover, even though it was completely the entity’s fault. Unfortunately, the IRS could not give him a break, even though he did absolutely nothing wrong, because IRS has no authority to waive the “once-per-year” rollover rule. When that rule is violated, the entire invalid rollover amount is taxable and subject to the IRS 10% early distribution penalty for IRA owners under age 59 ½. This case illustrates the importance of working with competent financial advisors and financial organizations when trying to move IRA funds.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to email@example.com for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at firstname.lastname@example.org or (516) 536-8282 with any questions.