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Distributions and "Undistributions"

Two recent letter rulings show that 'distribution' is a flexible term.

Natalie Choate, 11/09/2012

But subsequently I learned that such "impossible" transfers are not unheard of. Apparently if you can convince an IRA provider or plan administrator that it has made a mistake in sending money out of a retirement plan, you may be able to effect an "undistribution" of the funds. Some financial institutions have procedures for reversing a transaction, revising the paper trail, and even filing corrected "1099-R" forms with the IRS. I was told that the IRS itself even suggested this solution to one practitioner! I am indebted to Denise Appleby (see "Resources" below) and other "IRA gurus" who told me of their successes in helping participants and beneficiaries deal with these sticky problems.

So Sean should approach XYZ bank about revising its paper trail to show the correct account (the inherited IRA) as the recipient of this distribution. If he wants professional assistance with that process, I would suggest he call Denise Appleby or someone else experienced with this type of problem--not me!

Question: Can two distributions be considered one distribution?
Beatrice has been dissatisfied with the services of her IRA provider, ABC Company, and decided to move the account to a different provider, DEF Company. She was told that a direct IRA-to-IRA transfer would take weeks to complete, so to speed things up, she requested a distribution to herself of the entire IRA balance of $250,000. ABC Company sent her a check (payable to her) for the cash in the account ($160,000) on Date 1. She deposited that check in the new rollover IRA at DEF Company on Date 2. ABC Company took a little longer to liquidate some of the other investments in her IRA, but about 10 days after Date 1, on Date 3, they gave her a second check (also payable to her) for the remaining $90,000 of the account. She now wants to deposit this second check in her new rollover IRA at DEF Company, but isn't there a rule that a person cannot roll over, to an IRA, two distributions from the same IRA received within 12 months of each other? Is she stuck with a taxable distribution regarding that second check?

Answer: Again, maybe yes!
As of a while ago, I would have said Beatrice has a big problem. There is a hard-and-fast rule that a person cannot roll over (to an IRA) two distributions received within 12 months of each other from a single IRA. The IRS cannot waive this rule.

But then along came Private Letter Ruling 2011-05047, in which "Taxpayer A" received "distributions" (plural) from an IRA that he sought to roll over. The ruling recites that "On Date 1, Taxpayer A requested a total distribution of Amount D from IRA X. On the following day, Taxpayer A received most of the balance of IRA X and, on Date 2, Taxpayer A received a check for the remainder of the balance of IRA X." Taxpayer A intended to roll over "Amount D" to another IRA he had already established, but due to a series of family emergencies and a serious medical condition he missed the 60-day rollover deadline.

The IRS allowed a late rollover (i.e., waived the 60-day rollover deadline) for both of the "distributions...totaling Amount D." Although the one-rollover-per-12-months rule is recited in the ruling, the IRS does not seem to view it as applying to Taxpayer A's "distributions." Is that because Taxpayer A had requested a total distribution? Is this ruling telling us that if you request a total distribution and the IRA provider pays it out to you piecemeal it is still considered one single distribution for purposes of the one-rollover-per-12-months rule? Or is there some other unspecified rationale as to why these two distributions were really just one distribution? Or was this just a mistake by the writer of this letter ruling?

Although you cannot rely on someone else's private letter ruling as precedent, this ruling shows there may be more flexibility regarding the one-rollover-per-12-months rule than previously thought.

Resources: For Denise Appleby consulting, visit http://applebyconsultinginc.com. I highly recommend Denise's charts and quick reference guides for retirement and investment professionals.

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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