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March 3, 2009

Transfer vs rollover for check deposit

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Transfer vs rollover for check deposit

I have a check made payable to my new IRA custodian, for the benefit of (FBO) my IRA. The customer service representative at the new custodian says that it should be deposited as a trustee-to-trustee transfer, and cites Treasury Regulation 1.401(a)(31)-1 Q-4 as the authority. However, the former custodian contends that it should be deposited as a rollover contribution within 60-days. Which of the two is correct?

It depends on how the check was issued by the former custodian.

First, let’s address the cite provided by the new IRA custodian [Treasury Regulation 1.401(a)(31)-1 Q-4]. This cite does not apply in your case, because your assets came from an IRA. Treasury Regulation 1.401(a)(31)-1 Q-4 applies only to assets that are distributed from a qualified plan403(b), or a 457(b) plan.  Therefore, we cannot use this as the basis or guidance for how the deposit should be processed.

So let’s talk about what determines how this deposit should be processed.

The new Custodian (B) , is required to process the deposit as a Rollover Contribution  if it was processed as a distribution by the former Custodian (A). The question becomes, ‘why would the former custodian make the check payable in such a manner, if they processed it as a distribution?’ Here’s a scenario that would answer that question:

IRA owner walks into brokerage firm A and says, I want to move my IRA to brokerage firm B. Brokerage firm A says, you have two options:

  1. Go to brokerage firm B, and have them initiate a trustee-to-trustee transfer
  2. Go to brokerage firm A, and have them process the transaction as a distribution.

When a Rollover Would Apply

A trustee-to-trustee transfer can take up to 7-days  ( after it is initiated) to be completed . It could take even longer, if Custodian A or Custodian B is not an ACAT eligible firm. Note that the end result of a trustee-to-trustee transfer is that the transaction will be non-reportable, non-taxable, and will not be subject to the once-per-12-month rule that applies to IRA-to-IRA rollovers.  But, the IRA owner does not want to wait that long and requests a check for his account balance  made  payable to his IRA. Because this transaction does not meet the trustee-to-trustee requirements (see below) and therefore has to be processed as a Distribution, Custodian A requires the IRA owner to complete a distribution request form. This form gives  the IRA owner the option to make the distribution payable to any party he wants to (including himself and his new IRA Custodian), hence the option to have the check made payable to the new custodian FBO the IRA. This is reported as a distribution on Form 1099-R, regardless of who is the payee, and must be reported as a rollover contribution to the receiving IRA by the new custodian on Form 5498. If it is not reported as a rollover contribution, the IRS will contact the IRA owner regarding the failure to include the amount in his income. This is because the IRA owner would ( should ) not include the amount in income, if it is properly rolled over .

When a trustee-to-trustee transfer would apply

The transaction should be processed as a trustee-to-trustee transfer by the new custodian (B), only if it was processed as a trustee to trustee transfer by the former custodian (A). Typically, a delivering (or current) custodian will process a transaction as a trustee-to-trustee transfer when it receives an acceptance letter from the receiving custodian confirming that they will deposit the amount to an IRA-of a similar type- as a transfer, or when the receiving custodian initiates the transaction as a trustee-to-trustee transfer through the ACAT system. Additionally, the receiving custodian will typically deposit the amount as a trustee-to-trustee transfer if either (a) they initiated the trustee-to-trustee transfer through the ACAT system or (b) provide an acceptance letter to the delivering custodian before the transaction is processed or requested by the IRA owner, indicating that they will deposit the amount to an IRA as a trustee-to-transfer if the assets are delivered from an IRA of the same type as the receiving IRA. .

This is a compliance issue for the custodians. They should not treat the transaction as a trustee-to-trustee transfer, unless they are certain that it is processed as such on both sides, and that the movement occurs between IRAs of the same type. For this purpose, same type means:

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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