Roth distrubution subject to 10% penalty and other taxation if reinves

[Guest Rok]

Last year in April, I closed out 2 Roth accounts with one investment company, simply because when I was enrolled in them by an agent, he neglected to tell me of penalties and such. I wanted to put them into another investment company, and being new to this I did not know I could simply roll them over into it without ever withdrawing.

When I closed out the accounts over the phone, the rep on the other end said they could handle the tax penalty or I could do that. I told them I would, but I planned on reinvesting it. They said I had 30 days to reinvest the full amount without suffering the penalties.

Anyway, here is my question. I closed the account on 3-17, and finally got the new agent to finalize the paperwork on 4-17; I gave him the check for the full amount I had withdrawn then. On this company's statement, it shows 4-25 as their account creation date.

So, do I still have to pay the 10% penalty and add that money to my income, even though I got it reinvested? When I had my taxes done today, I had some 3rd year college student doing them, so I felt that she didn't have years of experience and information working for me.

Thanks

Shi

[Michael Devault]

The law allows 60 days in which to roll distributions from one Roth IRA into another Roth IRA without taxes or penalties. But, you can only do it once per year on each Roth IRA.

[John G]

The 60 day rule will no doubt come up again. I wonder what qualifies as meeting the deadline. For example, if you take the check and hand it to the new custodian 6 weeks later (constructive receipt) but they don't book it in (perhaps due to IRA backlogs) until after the 60 days have you met the requirement? Note in the original question above they took 8 days to record the transaction!

I would assume that you have met the requirement. I would certainly want a date stamped receipt from the custodian to show the IRS if questioned.

Is constructive receipt sufficient?

If you mail/fedex the check before the 60 days, does that meet the requirement?

Clearly, most folks should use the custodian to custodian direct transfer rule which keeps you out of any 60 day rule problems.

[Michael Devault]

Good points. Here's some information to think about:

1. The 60 day period seems to start when the taxpayer receives the distribution. In Letter Ruling 883043, the Service indicated that the 60 day period started on the date of receipt, even though the check had been issued 10 months earlier but delivery was delayed because of an incorrect address.

2. In Wood v. Commissioner, the Tax Court held that a timely rollover occurred when a corrective bookkeeping entry was made after the 60 day period, but the money was received within the 60 day period.

I believe that this points out that constructive receipt is sufficient, but I certainly agree with John that good records be kept on when the money was received and when it was sent out. Sending it FedEx or by some other means that requires the recipient to sign is a good idea. Another good idea is to make sure the transaction is completed well within the 60 day time limit.

There was some indication in the last tax bill that Congress wants to give the Treasury the ability to waive the 60 day requirement in some situations where the 60 day time limit is not met due to unusual circumstances. This will be a step in the right direction, since the IRS currently has no authority to waive the 60 day rule, even if they want to.

[John G]

Michael,

The tax court ruling was interesting and sensible. Last year we had a couple of postings about requests for conversion made in December (with receipt!) and a failure by the custodian to complete the transaction before year end. I would think that the brokerage would have an internal way to fix that problem... but they seem to say "too bad". Brokerages seem to back date other stuff that goes wrong or gets lost.

Another lesson in not waiting to the last minute, keeping records, and most important checking that stuff gets done on time!