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Multiple IRA rollovers in one year

gary1861
Level 4

taxpayer wasn't happy with IRA performance, so she closed IRA and took the check to a new provider.  Then she didn't like that one, so she closed IRA and took the check to a third provider.  I know that only one transfer per year is allowed, so the one is fine.  On the second distribution I can mark as non-rollover and the tax will calculate correctly.  The taxpayer took a small distribution from 3rd provider, which shouldn't have been an IRA.  Two questions - 

1 - What do I do about the distribution on the 3rd one?

2 - I know she has to withdraw the IRA as she contributed way more than the allowed amount - zero since she has no earned income.  Is that reported on the tax return, and if so where?  Is it on Form 5329?

 

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4 Replies 4
qbteachmt
Level 15

"I know that only one transfer per year is allowed,"

Think of it as "direct or indirect."

Transfers between the trustees, or direct, are not counted.

But every time she took the money, "touched it" first, that means it was an indirect = went through her hands, first.

And you stated the deposit for the third event was just as a brokerage or savings account, then. So, the answer to Q1 = just regular banking. Not a distribution, but a withdrawal. If there wasn't enough of a cash balance in a brokerage account, then something gets sold to accommodate the withdrawal, and there will be a 1099-B.

Question 2 answer: none of a Rollover is considered to be Contribution. These are two different ways money goes into IRA accounts. If there was not also more money put in, for the second deposit, or put into the initial account in the first place, you have no contribution in what you described.

 

But you also might be overlooking, if this is for 2020, there is a specific provision for "take it out, then put it back" that is Not counted against the once-a-year provision, due to covid as disaster.

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qbteachmt
Level 15

Oh, I overlooked who you stated this: "from 3rd provider, which shouldn't have been an IRA."

Shouldn't Have Been, has nothing to do with Reality. What type of account was this, when it got created?

And it would really help if you stated not just IRA, but Traditional or Roth.

Make sure to read the cares act for RMD and distribution rollover rules that are specific to 2020. You might be understanding the step-by-step incorrectly for the tax year provisions.

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gary1861
Level 4

The 3rd account title is IRA....FBO (client)....  So yes it was set up as an IRA account.  Seems that client was working with a financial advisor - for what that is worth.  Yes, it was a traditional IRA.  No she didn't put back the RMD by August 31, 2020, since this last withdrawal/transfer, etc. didn't happen until after that date.  Sorry if I wasn't clear on the transactions.

As for #2, I now understand that if she withdraws the money prior to 4/15, that "excess contribution" doesn't get reported on the tax return.

 

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qbteachmt
Level 15

Okay, let's tell the story one step at a time:

Closed a Traditional IRA by taking a complete distribution with no taxes withheld (gross distribution) and hands it over to a new Traditional IRA for deposit within the allowed timeframe (typically 60 days, or if considered distributed under covid-CARES, the timeframe was untl Aug). If so, that doesn't count against the "one per 12 months" (the rule is not One Per Year).

If taxes were withheld, the rollover would need to be refilled to Gross using other funds available. Or, the partial amount not refilled is a taxable distribution.

Or, it didn't qualify for rollover. But we are assuming at this point there was a legit rollover.

Then, she did the very same thing, again.

"On the second distribution I can mark as non-rollover and the tax will calculate correctly."

This is why it is step by step. Sure, that takes care of tax treatment, penalty.

"No she didn't put back the RMD by August 31, 2020"

Wait, which part was an RMD? Are you explaining that the "small distribution from 3rd provider" was really RMD?

There seems to be a disallowed rollover. If you can get that back (corrective distribution) before filing the tax form, it's as if it never happened (well, some of it). There likely will be some earnings, which will be subject to penalty.

https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

"Tax consequences of the one-rollover-per-year limit

Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts:

  • you must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months (unless the transition rule above applies), and
  • you may be subject to the 10% early withdrawal tax on the amounts you include in gross income.

Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be:

https://www.irs.gov/retirement-plans/ira-one-rollover-per-year-rule

And that's why Question 2 doesn't apply. You don't have a Contribution, there is no new money and there is no expectation of Earnings related to rollover activities. It's just moving around the funds, and it's supposed to be within the allowed provisions between the various types (such as, employer pan to traditional IRA doesn't fall in the one-every-12-month limit) and some of the movement is a conversion from sheltered and never-taxed to taxable event or taxable distribution. That's also why you track Basis, so that you don't pay taxes on money you put into retirement already post-tax. So, that's one thing you don't have to worry about.

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"Level Up" is a gaming function, not a real life function.
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