Re: IRA Rollover Question

In article <xaZTj.336$8i5.121@xxxxxxxxxxxxxxxxxxxx>,
"Fred" <frtanel35@xxxxxxxxx> wrote:

"Ernie Klein" <ecklein@xxxxxxxxxxx> wrote in message
news:ecklein-F4DD70.12020705052008@xxxxxxxxxxxxxxxxxxx



I would be very leery of this whole thing because it could result in
both an early distribution (if the actual distribution is not _itself_
rolled over within 60 days) which could result in the loss of the IRA,
income tax due, and a penalty; _and_ the new IRA may be seen as an
invalid contribution that exceeds the allowable yearly contribution
which could result in still another penalty and loss of that IRA also.

Others might suggest otherwise or the best way out of this mess.

You posted your question in 3 different groups -- please see the answers
in those groups also.

It was the bank's idea to do this. Two different people at the bank thought
it was legitimate and one person at another bank (not directly involved in
the transaction) also concurred.

You might get better answers from the moderated group, but as is often
mentioned there - it is not wise to get tax advice from a banker.

The theory is that since the IRS allows a 60-day grace period to open the
new IRA, that means the exact same funds that are received don't have to be
used for the new account. In a more normal situation, for example, a person
could receive $50,000 from a distribution, put it into some kind of
investment, and then 60 days later pull $50K from some other source and open
the second IRA. This is done all the time. So the concept is clear in the
law that it doesn't have to be the exact same funds, as long as the dollar
amounts match up.

Except the rule says "_after_ the day you _receive_ the distribution",
not as long as the "amounts match up". The word "day" seems (to me
anyway) to say that you are not even supposed to make the transaction on
the _same_ day, but only _after_ the day you receive the distribution.

Also, it is clear from Pub. 590 that the IRS sets an upper limit or "latest
date" for opening the second IRA, which is 60 days from the time the initial
funds are received. Nothing in Publication 590 explicitly mentions a lower
limit or "earliest date" for opening the second IRA. The bank's theory is
that the earliest date is the date you close the first IRA, meaning that you
transmit the request for the account to be closed and for the funds to be
disbursed.

I think that is fine for a trustee to trustee transfer when _you_ never
personally receive the funds, or a change of investment within the same
trustee like *this transaction should have been*, except you would never
personally receive the distribution if it were.

What is the bank going to do for you if it turns out that their "theory"
is not correct and the IRS disallows all of this?

BTW, when the bank gets around to issuing a 1099-R at the end of the
year, how are they going to code it? Have they said that they _will_
code it as a rollover? If they code it as a normal (or early)
distribution, you might have a hard time explaining it to the IRS, and
by then it will be way too late to make any changes.

The fact that the funds haven't actually been received yet is
irrelevant, since the IRS allows the use of different funds as long as it is
done no later than 60 days after funds are received and the amounts are the
same.

Pub 590 is NOT the tax code, and like all IRS pubs, doesn't always cover
all situations and can be subject to interpretation.

I am not a tax expert, but I sure would be uneasy with trusting the bank
on this. It would be interesting to see the language in the actual tax
code (rather than Pub 590) that covers this issue.

I am not a lawyer either, but if the language in the Pub is correct,
then it seems to me that since you funded the new IRA _before_, not
after, you received the distribution, that would make the new IRA void
(excessive contribution), and the distribution from the first IRA would
now count as ordinary income subject to income tax, and also a penality
for early withdrawal.

If I were you, I would not be getting my advice from either a bank or
strangers in a news group, but would seek out professional advice from a
local tax expert (and not a store front tax service) such as, a tax
attorney, a CPA that specializes in tax, or an enrolled agent.

--
-Ernie-
.

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