Transfer of part of Rollover IRA to another institution: best way to do it.

[Guest rkal66]

I have a rollover IRA with an institution and I want to roll over about 75% of it to another institution. I will liquidate enough assetts so that I have the amount I want to roll over in cash. The rollover form from the new institution has the option of rolling over 100%, or designating which assetts to roll over. I am afraid this will get screwed up. So here's the question: Can I use the checkbook I have from the first institution to just write a check to the second institution? I know this is not an institution to institution transfer, but I believe I could even keep the funds for 60 days if I wanted to. So could I also transfer the funds from the first institution to my bank checking account, and then write a check to the new institution? I believe I can elect no withholding in either case so that should not be a problem.

[Appleby]

I am a little uncomfortable with you using the checkbook to accomplish the rollover, because the transaction will occur in reverse order. Generally, a rollover is accomplished when the assets are (a) distributed and (b) rolled over. By using the check, your transaction will be (a) the rollover contribution and (b) the distribution, which will occur when the check has been posted to your IRA, i.e. possible several days after the rollover contribution is made to your IRA. I can’t site any regs that says this cannot be done- I doubt it has even been addressed…however, it seems all the rules relating to rollover talks about the rollover contribution being made within 60-days after the distributed assets are received, which suggests that the distribution must first occur in order for a rollover contribution to occur…

I vote that you have the transaction processed as a direct trustee-to-trustee transfer, or request a distribution of the amount, and after you receive the check, deposit it as a rollover contribution to your second IRA…. it is safer to use the process that you are absolutely sure is allowable.

Let’s see if anyone else can provide some insight...

Regarding the withholding ---generally, IRAs with check writing capability include a provision that requires the IRA owner to waive withholding on all distributions processed VIA checks written against the IRA. If this is the case for your IRA, then withholding would not apply.

[John G]

I agree that a direct transfer is generally the better approach and has fewer problems. However, the 75/25 issue may cause some problems. Most institutions assume that a rollover is for the complete amount. Even if you specify otherwise, a harried clerk may click the wrong option.

I have had two friends that for complicated reasons wanted to break up one IRA into about 5 pieces. They had many problems where the new custodian tried to grab the entire account, even though they have specified otherwise.

I still believe that the best way to proceed is to have a clearly written letter of instructions to attach to the new account papers and alert your current IRA custodian of the transaction.

I have a question. WHY? In an era where most brokerages allow you to hold assets from almost any mutual fund, stock or bond, I wonder why you would want to split up the account. The annual account fees might not matter to you, but they may increase. The existing IRA custodian might charge you a liquidation fee. Your paperwork and tracking will increase.

[Guest rkal66]

The reason I want to do it that I want to have part fo my IRA funds managed by a money manager, but I still want to keep part of my original account to manage myself.

Good point on writing a check that gets posted after the transfer. Suppose I just withdraw the funds by EFT to my bank (which I've done many times for income). Then I can write a check on my bank checking account to open the new IRA.

[mbozek]

I dont see any issue here since issuing a check to the new custodian is an assignment of the owners interest in the IRA and under Reg. 1.408-4(a)(2) an assignment of interest is deemed a distribution by the IRA owner. The current IRA custodian reports the check as a distribution and the owner reports the deposit to the new custodian as a rollover. The distribution occurs when the check is mailed or otherwise given to the new custodian, eg. an mrd occurs on the date the payment is sent out (mailed or EFT) not when it is received. The rollover occurs when the check is deposited by the new custodian. This is consistent with other IRA rules (IRA contribution is deemed timely made if a mailed check is postmarked by April 15th not on the date the check clears the owner's bank.)

[Guest rkal66]

Another thought; could I open a second IRA at the original institution, transfer some of the funds to it, and then transfer one of the IRAs to the new institution?

[Appleby]

I am not disagreeing with your analysis- but I am not convinced- not yet anyway.

The cite to which you refer states does not appear to address this timing issue

I agree that a check could represent an assignment- however an assignment does not necessarily affect when the distribution actually occurs from the IRA. It would appear that in this example (being discussed) the assignment is more of a ‘promise to pay upon demand’. Let’s look at an example:

John writes a check against his IRA#1.

John deposits the check to his IRA#2 on December 31,2003. The IRA custodian #2 will issue a 5498 (reporting the contribution) for year 2003.

The check takes a few days to complete the clearing process, and as a result, is not presented to IRA custodian # 1 until January 5th.

IRA Custodian will issue the 1099-R for the year they honored ( used the check to debit John’s IRA) the check.

Can you see the red flag? The end result may be OK as there is a logical explanation, but who wants to waste time explaining to the IRS, why you made a rollover contribution in 2003, when you had no distribution in 2003 or 2002? Or why you are not including on your tax return a distribution you received in 2004, for which there is no rollover contribution in 2004 or 2005?

You are right on the money with the RMD explanation- but this applies because the EFT transaction occurs when the IRA is debited, ergo when the distribution occurs. If you were to use this (EFT) as an example, then it appears you should apply equal treatment to both transactions- i.e. determining when the funds left the IRA.

[Appleby]

Another thought; could I open a second IRA at the original institution, transfer some of the funds to it, and then transfer one of the IRAs to the new institution?

Yes you could. But as John G explained, you may want to take the applicable fees into consideration and decide whether it is worthwhile...The custodian may charge maintenance and closing fees to the second IRA that you establish to accommodate the transfer

[mbozek]

The date of distribution is the date the owner gives up dominion and control of the IRA funds, e.g., mails the check. This is why MRDs and contributions are deemed made on the date postmarked not on a subsequent date. The date the check is honored by the IRAs custodian's bank or processed by the IRA is not the same as the distribution date of the taxpayer- it is a record date for the custodians that is used by convention because in most cases the distribution/rollover occurs in the same year. Some custodians backdate Mrd checks cut at the beginning of the year to the prior tax year if a request was made by 12/31. Unless the transfers occur at the very end of the year your hypo will never be an issue because the IRS does not audit the millions of IRA rollovers. If withdrawal is made at the end of the year then deposit the check to the new institution after the end of the year so that the 1099 conforms to the tax year of the rollover. Many IRA owners deposit IRA distribution checks with a new custodian on the same day it is paid in a check to avoid losing any interest. Under your logic these would be distributions because the check was deposited before it is honored by the payor custodian's bank.

[Appleby]

MRDs are deemed made on the date postmarked not on a subsequent date? On what do you base this mbozek? I hope not 1.408-4(a)(2).

I agree IRA contributions are deemed made by the date of the postmark- but never heard that about RMDs. In fact, many custodians required RMD requests to be received by them by certain dates in order to guarantee that it will be processed and reported as an RMD for the year. Some institute deadlines as early as December 1 and do not accept postmarks. They cannot do so ( institute deadlines) for IRA contributions, as the law is clear about the postmark applicability.

Custodians backdating RMD requests to the previous year is an operational decision and good customer service- not a requirement. I think you know this---therefore, the related statement does not support your point or disprove mine.

I agree that my example would not occur very often- that was just an example to demonstrate my point.

You said “Under your logic these would be distributions because the check was deposited before it is honored by the payor custodian's bank” I agree that they would be distributions- but not for the reason you state. They would be distributions because they are considered paid to the IRA owner, as opposed to being paid to a successor custodian FBO the IRA owner.

Much of what you say makes sense- but it seems we have to agree to disagree on the core issue, which is “when is a distribution considered to have occurred, if the distribution is as a result of the IRA owner drawing a check against the IRA …and the payee present said check to the Drawee on a date later than the date on which the IRA owner made the payment to the payee?"