Roth IRA Annual Rollover

[Draggon]

We are in the process of applying for a construction loan to build our new home. We’re both retired, but neither of us is 59 1/2 yet (I turn so in April of this year).

As part of qualifying for the loan, I was required to set up a monthly distribution from my IRA account - in this case a Roth that I’ve had since Roth’s first became available with max contributions the entire time. This is to show enough income to qualify for the loan, and I was told it had to be an IRA rather than our taxable account since I was under 59 1/2. I was told that after closing, I was free to cancel the monthly distribution arrangement and that there were potentially methods available to return the distribution if I desired.

In my reading of related topics and the IRS rules, I believe I can return the funds to the Roth IRA within 60 days with no issue. I surmise that you can do this once each 12 months (not calendar year based).

I set the distribution up to start mid-December, and I anticipated only having one distribution before closing. However, as usual with life, the closing is going to be delayed past the date of the established January withdrawal.

So, my question, should anyone be kind enough to answer, is - am I able to treat the December and January withdrawals as one total annual rollover amount assuming I return the entire amount of the two withdrawals to the Roth IRA before 60 days pass from the initial (December) withdrawal?

[aj485]

@Draggon

In my reading of related topics and the IRS rules, I believe I can return the funds to the Roth IRA within 60 days with no issue. I surmise that you can do this once each 12 months (not calendar year based).

Not exactly, if by “the funds” you mean ALL of the distributions. You are allowed to return one (and only one) of the monthly distributions, as long as you do it within 60 days. You are correct that you are allowed to do this only one time within a year, which applies to each distribution.

@Draggon

So, my question, should anyone be kind enough to answer, is - am I able to treat the December and January withdrawals as one total annual rollover amount assuming I return the entire amount of the two withdrawals to the Roth IRA before 60 days pass from the initial (December) withdrawal?

Nope. You can return either the December or the January distribution, not both.

AJ

[buynholdisdead]

@Draggon

As part of qualifying for the loan, I was required to set up a monthly distribution from my IRA account - in this case a Roth that I’ve had since Roth’s first became available with max contributions the entire time.

You might want to look at the 55 rule if you are over 55 and have a 401K. If the only investment vehicle you have are IRA’s then it will not apply. Most (Not all) 401k will allow you to remove money after 55 if you meet the criteria. Talk to the plan administrator (Fidelity, Schwab, etc.)

Using the Rule of 55 to Take Early 401(k) Withdrawals

[aj485]

@buynholdisdead

You might want to look at the 55 rule if you are over 55 and have a 401K.

It’s too late. @Draggon already took one distribution in December, and needs to take another one in January, because the loan is closing in January, but later than the distribution date.

@buynholdisdead

Most (Not all) 401k will allow you to remove money after 55 if you meet the criteria.

One of the criteria is that you have to have left the company in or after the year you turn 55, not just that you are over 55.

@buynholdisdead

Talk to the plan administrator (Fidelity, Schwab, etc.)

In a similar situation, I did talk to my administrator and if I wanted to take monthly distributions from my 401(k) using the rule of 55, I had to set up a non-cancellable distribution schedule. It was only cancellable by completely distributing the 401(k). So anyone who is considering this needs to be completely sure of all the rules that their 401(k) plan sets for taking rule of 55 distributions.

AJ

[aj485]

@Draggon

As part of qualifying for the loan, I was required to set up a monthly distribution from my IRA account

Hindsight is 20/20, and it’s too late for you in this case, but did the mortgage company actually require a ‘monthly’ distribution? Or could you have set it up so that it was a quarterly, semi-annual or annual distribution? If you had been able to take less frequent distributions, you could have taken just one larger distribution, and then returned the entire distribution, as long as you closed within 60 days of the distribution.

I will point out that there is some risk, if the closing is delayed enough so that the 60 day window passes. But if you are taking quarterly distributions, and the closing is delayed that much, you would have had to take a minimum of 3 monthly distributions and probably 4 distributions, so there’s a similar amount of money that would not be able to be rolled back in.

AJ

[buynholdisdead]

@aj485

It’s too late. @Draggon already took one distribution in December, and needs to take another one in January, because the loan is closing in January, but later than the distribution date.

On an IRA. Not a 401k. Do not get an IRA mixed up with a 401k or 403B. The 55 rule does not pertain to an IRA. If you move a 401k or 403b into an IRA you will not longer be allowed to take the 55 rule.

@aj485

In a similar situation, I did talk to my administrator and if I wanted to take monthly distributions from my 401(k) using the rule of 55, I had to set up a non-cancellable distribution schedule. It was only cancellable by completely distributing the 401(k). So anyone who is considering this needs to be completely sure of all the rules that their 401(k) plan sets for taking rule of 55 distributions.

My wife and I both followed the 55 rule. I was aware of it before I retired, I had a 401k, but when I talked to the plan administrator for her 403B, which was Fidelity, he told me most plans allowed it. We did not have to set up a distribution schedule.

@aj485

I had to set up a non-cancellable distribution schedule. It was only cancellable by completely distributing the 401(k)

I don’t believe that you were taking a distribution following the 55 rule. It sounds like you were following a distribution under the SEPP plan.

[aj485]

@buynholdisdead

On an IRA. Not a 401k. Do not get an IRA mixed up with a 401k or 403B. The 55 rule does not pertain to an IRA. If you move a 401k or 403b into an IRA you will not longer be allowed to take the 55 rule.

But the purpose of taking the distributions was to qualify for a construction mortgage, which they will be closing on later this month. It’s too late to use distributions from a 401(k) to qualify for that mortgage. The issue has nothing to do with the differences between an employer plan (like a 401(k) or 403(b)) and an IRA (which I am well aware of and have not confused). It has everything to do with timing. Which is why I said “It’s too late.”

@buynholdisdead

My wife and I both followed the 55 rule. I was aware of it before I retired, I had a 401k, but when I talked to the plan administrator for her 403B, which was Fidelity, he told me most plans allowed it. We did not have to set up a distribution schedule.

Yes, I used the rule of 55 also. I could (and did) take partial distributions whenever I wanted to.

That wasn’t good enough for the mortgage company when trying to qualify for a mortgage. As in @Draggon’s case, the mortgage company wanted to see documentation of consistent verifiable income being sent to me, rather than being pulled at my request, before I could qualify.

@buynholdisdead

I don’t believe that you were taking a distribution following the 55 rule. It sounds like you were following a distribution under the SEPP plan.

Sorry, you would be wrong in your belief. My plan’s rules required me to annuitize some/all of the money in the plan in order to be able to receive monthly, quarterly or annual distributions when using the rule of 55. I don’t know if the annuity that was set up would follow SEPP rules or not because I didn’t dig into it any further. Not that they would have needed to use SEPP, because the distributions qualified as Rule of 55 withdrawals.

AJ

[Draggon]

@aj485

Nope. You can return either the December or the January distribution, not both.

Ah, thank you. I figured it wouldn’t be so easy. No big deal - both will be only Contributions, so no penalty. I just would have liked to put it all back in for the tax-free growth.

@buynholdisdead

If the only investment vehicle you have are IRA’s then it will not apply.

Right - I transferred my 401k to a Trad IRA shortly after I retired. Thanks though.

@aj485

Hindsight is 20/20, and it’s too late for you in this case, but did the mortgage company actually require a ‘monthly’ distribution?

That’s what they asked to see and wanted a letter confirming it from my broker.

RE: other than monthly -
Good question and, of course, one I didn’t think to ask. Originally, I thought the loan would close on time, so I figured it was pretty straight-forward.

@aj485

the mortgage company wanted to see documentation of consistent verifiable income being sent to me, rather than being pulled at my request, before I could qualify.

Exactly. And I’ll be canceling the monthly distribution as soon as the loan closes and going back to pulling money as needed from my taxable account.

Thanks, AJ, for your valued input!

[Hawkwin]

@aj485

Not exactly, if by “the funds” you mean ALL of the distributions. You are allowed to return one (and only one) of the monthly distributions, as long as you do it within 60 days. You are correct that you are allowed to do this only one time within a year, which applies to each distribution.

On a bit of a tangent, while this is the rule, do companies 1) restrict it happening more than once or 2) somehow report such extra conversions on a 1099?

In my personal experience, I see no record of either. So, if the brokerage company is not detailed enough to either block or report to the IRS, then one wonders how the IRS would ever know.

[aj485]

@Hawkwin

On a bit of a tangent, while this is the rule, do companies 1) restrict it happening more than once or 2) somehow report such extra conversions on a 1099?

It’s not a conversion - it’s an indirect rollover that occurs within 60 days of the withdrawal.

The withdrawals will be documented in Box 1 on a 1099-R. 2024 Form 1099-R In this case, 2 different 1099-Rs - a 2024 one for the December withdrawal and a 2025 one for the January withdrawal. Box 2a may also be filled in, because the owner is under 59 1/2, even though it’s a Roth account. Because the owner of the Roth IRA is under 59 1/2, in Box 2b the “taxable amount not determined” will likely be checked, even if there’s not a number in box 2a.

In box 7, since it was not a direct rollover, code G will not be present. It will be coded as a J [Early distribution from a Roth IRA, no known exception (in most cases, under age 59½).] Form 8606 will be used to determine how much, if any, is taxable. In this case, because it’s all contributions, there won’t be any taxes.

Deposits to your IRA are not documented on a 1099. They are documented Box 1or Box 2 of Form 5498 2024 Form 5498 In order to be sure that these indirect rollovers are documented correctly in box 2 as a rollover, and not a contribution (box 1), you need to be sure that your brokerage understands that the money that you deposited was a indirect rollover that occurred within 60 days, and not a contribution. The default would generally be for them to assume that it’s a contribution and report it in box 1.

If it’s reported in Box 1 and you have no earned income because you’re retired (as in this case), you will get a letter from the IRS asking you to explain your over-contribution. So you will need to get the brokerage to correct the 5498 by putting the amount in Box 2.

If the number in Box 2 exceeds the number on the 1099-R, you will get a letter from the IRS asking you to explain how you rolled over more than you distributed.

@Hawkwin

In my personal experience, I see no record of either. So, if the brokerage company is not detailed enough to either block or report to the IRS, then one wonders how the IRS would ever know.

Especially in this case, with 2 separate distributions across 2 years, it would likely be easy to figure out by comparing the 5498 with the 1099-Rs.

AJ

[Hawkwin]

Yes, I was not precise in my first response. Same goes for indirect rollovers. In my experience, companies do not block multiple rollovers in the same year and do not discriminate on the 5498 - so I wonder how the IRS is even aware. Perhaps some brokerages do a better job than others on this point.

[aj485]

@Hawkwin

I wonder how the IRS is even aware

I suppose you might get away with it. But if you ever got questioned about the transactions for any reason - and in this case, it’s obvious that there are 2 different withdrawals since they are occurring in 2 different years, so there would likely be a question on how you made an indirect rollover of more than you withdrew - the documentation you would have to provide would let them know. For other situations, you might get away with cheating on your taxes.

AJ

[aj485]

@Hawkwin

one wonders how the IRS would ever know.

I would also point out that the IRS never knows if the withdrawals from HSAs were actually used to reimburse for qualified medical expenses. Or if a self-employed business owner is properly declaring income and expenses. Or if rental properties are properly being documented on Schedule E. And I’m sure that there are other things that the IRS doesn’t get documentation on. At least, not until there’s an audit.

So, I guess if you want to cheat on your taxes, there are lots of ways you can get away with doing so - until you don’t.

AJ

[aj485]

For anyone who is interested in reading about how the rules on the 60 day rollover came to be, here is a Kitces article from 2014 that I was just made aware of. The New Once-Per-Year 60-Day IRA Rollover Rules If you like understanding the details of how tax law is implemented, it’s an interesting read, as it goes through the original law and restrictions that Congress placed, how the case came about, what the tax court decided and how the IRS implemented the tax court decision.

AJ

[inparadise]

Again too late for Draggon, but before going with a conventional mortgage company that requires IRA distributions to qualify for a mortgage, check with your brokerage about getting an asset based mortgage approval. We briefly looked into one with Fidelity and it seemed reasonable, but in the end chose not to buy the property and didn’t look that closely. Just make sure you can afford the payments, as they likely will liquidate your accounts to pay if you default. No doubt it also locks your accounts in to that brokerage for the life of the loan.

FWIW,
IP

[GWPotter]

In December 2017 we got a bridge loan with our brokerage account as collarall - this is sort of similar. Indeed the Vanguard mutual fund shares were restricted from sale and the amount restricted was 130% of the bridge loan. This loan was from a local community bank.