IRA Rollovers & Violating The 12 Month Rule

I need confirmation that I am interpreting the rules and process for rollovers (not trustee to trustee transfers) from a traditional IRA to another traditional IRA. An elderly couple both in their late 60s removed the wife's funds from Bank A IRA in Dec. 2003, and deposited them into Bank B IRA in the same month. The funds in Bank B IRA were invested in a 6 month time deposit. When the CD matured in June 2004 they removed the funds and deposited them the same day into Bank C IRA who was offering a better rate. The customer representative in Bank C told them it was okay because the first rollover had occurred in 2003 and this rollover was occurring in 2004. Their income is normally below the filing threshold. However, the amount of the Dec.

2003 distribution was considerable and was coded as a normal distribution. They had not filed a tax return for 2003. I informed them that the 2003 distribution needed to be accounted for on a tax return as a nontaxable rollover and I would prepare the return. (I bet all you Californians are saying "They probably got a notice from the CA FTB asking why they hadn't filed! You're right!) I then informed them that the distribution in June 2004 violated the 12 month rollover rule and is fully taxable in 2004 as a normal IRA distribution. I also informed them that the amount that was now sitting in Bank C IRA was an excess contribution and unless they removed it with the earnings, it would be subject to the annual 6% excise tax. Did I get this right?

I also don't believe that there is any way to retroactively change the tax situation. I'm thinking that their only recourse is to try to get Bank C to make them whole or to take Bank C to court as they relied upon the erroneous advice of the bank's representative.

-- Alan

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Reply to
A.G. Kalman
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Well I think your application of the law is correct. The only possibility I see other than the ones you pointed out, is look for any authority on exceptions to the 12 month rule. There is authority for exception to the 60 day rule for reasonable cause, maybe there is something on the 12 month rule.

-- David M. Woods, EA, ChFC, CLU Woods Financial Services Norwood, MA 02062

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Reply to
David Woods, EA, ChFC, CLU

Nada! I searched.

-- Alan

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Reply to
A.G. Kalman

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