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IRA Custodian Creates 60-Day Rollover Problems

In a recent 60-day rollover private letter ruling request, an individual was allowed to complete a rollover of only a portion of his IRA distribution. Here is what happened.

“Tony” wanted to do a Roth conversion of his SEP account balance. The new Roth account was an annuity. On August 10, Tony completed the Roth conversion paperwork. Six weeks later, and before his funds had left his SEP IRA account, Tony sent a cashier’s check to the Roth IRA custodian and directed that the funds be placed in his new Roth IRA. The custodian instead placed the funds in a non-IRA account.
IRA rollover problem
The delay by the SEP IRA custodian is one of the primary reasons why individuals do 60-day rollovers to move IRA funds. It is really hard to believe that it would take any financial institution more than six weeks to send your funds to another institution.

But Tony created more problems by his actions. Tony cannot front his own personal (non-retirement account) money to make the deposit in the Roth IRA and pay himself back when the IRA funds are finally released by his seemingly very reluctant SEP IRA custodian. If the Roth IRA custodian had followed Tony’s instructions, he would have had non-qualified funds in a qualified account. Tony’s personal funds are not eligible to go into a Roth IRA for anything other than an annual contribution. Any amount above that would be subject to a penalty of 6% per year for each year it remained in the Roth account. Luckily for Tony, the Roth IRA custodian did not put the funds in a Roth IRA, but instead put the funds into a non-qualified account, which is actually where they belonged.

Then Tony got the check from the SEP IRA and deposited the funds into his own checking account. Less than two weeks later, he sent money to the Roth custodian and requested a recharacterization of the Roth IRA. A Roth recharacterization can only be done as a direct transfer, never as a 60-day rollover. Apparently Tony did not understand the IRA rules at all. The Roth custodian placed the additional funds in a non-qualified account as well.

The end result of all of this was that IRS let Tony put some funds back into an IRA, but not the full amount of his original SEP IRA balance. Both of Tony’s IRA custodians made mistakes here. The SEP custodian did not timely release Tony’s IRA funds. The Roth custodian apparently did not tell Tony that his funds went into non-qualified accounts, despite his instructions to the contrary. But Tony made mistakes too. He did not follow the most basic of the IRA and Roth IRA rules. He was only spared the consequences of his actions by the mistakes of his custodians.

Because of a recent Tax Court ruling, it will be more difficult for individuals to move their IRA funds beginning next year. In the Bobrow case, the Tax Court determined that the tax code only allows an individual to do one 60-day rollover to another IRA account per year - not per account. Individuals can still do as many direct transfers as they wish, but only one 60-day rollover. As Tony’s case illustrates, custodians can make it very difficult for their customers to do direct transfers.


- By Beverly DeVeny and Jared Trexler

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