Serial IRA Rollovers

Today TaxMama hears from Steven in NJ who is totally bewildered by a friend’s behavior. Here’s the long story. “My friend has about half a million dollars in an IRA account. He took a distribution of $50K from the account and told the bank it was a rollover. Before the 60-day rollover deadline, he sent the $50K back to the bank to put the money back into his account. Then he took a $100K rollover, using the money for improvements on his home. Before 60 days ended, he paid back his IRA. Then took more money out. My friend has now done this three times – all on the advice of his Certified Financial Planner. I know this isn’t kosher, but I can’t find any IRS documentation prohibiting this practice. Am I crazy? Is this allowable? “

Hi Steven

I can see why you would be disturbed by the practice you’re describing. It doesn’t feel right, does it?

Well, without doing any research deeply into the Code or Regs, I came across this in IRS Pub 590, where it talks about rollovers:

”Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.
http://www.irs.gov/publications/p590/ch01.html#d0e4069

So, I see two problems here, other than the fact that the poor benighted fool is getting tax advice from his CFP instead of his EA or CPA. Certified Financial Planners are trained to manage your assets, not cut your taxes.

1) A rollover means the money is going from one account to ANOTHER account. It does NOT mean borrowing the money from an IRA and putting it back.

2) You may only do rollovers once in any 12-month period, i.e. after 12 months PLUS one day.

These activities are loans from his IRA. That IRA is now disqualified.

And all that money is now taxable, with penalties. And probably interest.

And remember, you’ll find answers to lots of questions about self-destructive financial behavior and other tax information, free. Where? At TaxMama.com

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