At the end of the first quarter of 2013, total retirement assets in the U.S. reached $20.8 trillion. IRAs had a 27.4% “market share” of the total, with an estimated $5.7 trillion. Most retirement capital is being managed by institutional professionals, but not so the IRAs. Accordingly, there are a great many possibilities for missteps. Here are three examples.
Failed Roth conversion of RMD
Q. I’m 73, so I have to take required minimum distributions (RMDs) from my $1 million IRA. To get around that, I transferred the full balance to a Roth IRA, and paid the taxes from my taxable portfolio. Any problems with that?
A. Just one. You can’t convert an RMD to a Roth IRA. In your case, the RMD comes to about $40,485. The good news is that you will be deemed to have taken the RMD, so there’s no 50% penalty for not taking it. The bad news is you’ve made an excess contribution to your Roth IRA of $40,485. There is a 6% excise tax penalty imposed on the excess contribution. Your best remedy is to cure the problem with a corrective distribution of the excess amount.
Missed the 60-day deadline
Q. I received a big retirement plan distribution which I meant to roll over to an IRA, but I didn’t get to it within 60 days. What can I do now?
A. The best way to handle a rollover is a trustee-to-trustee transfer. Are you certain that you received a distribution? That is, if the distribution check is made out to the recipient plan, instead of to you, this may still be a trustee-to-trustee transfer. Such a check may be delivered to the payee plan after the 60-day deadline has passed, even after the death of the participant.
If that solution is not available, the next question is whether an exception to the 60-day rule might apply. These exceptions are:
First-time homebuyer. Let’s say your withdrawal was a “first-time homebuyer” distribution. If there is a delay or cancellation of the purchase or construction of the home, the amount withdrawn may be recontributed back into the IRA without penalty. The time limit on this is 120 days, instead of 60 days.
Disaster-based extensions. If a federal disaster has been declared in your area, the IRS may issue a pronouncement on the availability of automatic extensions for various filings, which may include your rollover.
Financial institution errors. If you took action within 60 days, but the deposit to the IRA happened after 60 days solely due to an error by your financial institution, you can get an automatic waiver of the 60-day rule. This works provided the funds are deposited in the eligible plan within a year of the original distribution.
Frozen deposits. If a bank becomes insolvent, so that a participant can’t get the money out in time to meet the 60-day rule, the rule is suspended. The time during which the money has been frozen doesn’t count toward the 60 days, and the participant has 10 days after the assets are unfrozen to complete the rollover.
© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.