IRS: When a Custodial Institution Fails, IRA Rollovers Not Covered by Annual Limit
The IRS Office of the Chief Counsel has reiterated an earlier IRS statement that Congress did not intend the one-rollover-per-year limit for IRAs to apply when the custodial institution fails.
In Chief Counsel Memo 2017-18, Associate Chief Counsel for Tax Exempt and Government Entities Victoria Judson wrote to Bret Edwards, director of the Federal Deposit Insurance Corporation’s (FDIC) Division of Resolutions and Receiverships concerning the income tax consequences of IRA distributions made from a failed financial institution for which the FDIC has been appointed receiver and for which there is no acquirer for the IRAs maintained with the failed institution.
Judson reiterated that generally, a distribution from an IRA other than one of after-tax amounts and a qualified distribution from a Roth IRA is includible in the depositor’s gross income in the year the distribution is made, and may be subject to a 10% additional tax if the depositor is under age 59½. However, Judson notes, current taxation may be avoided if the distribution is rolled over to another IRA or to certain other types of retirement plans, as long as the rollover is made within 60 days and the depositor did not roll over another IRA distribution that had been received in the preceding 12 months. The one-per-year limitation does not apply to rollovers to or from other types of retirement plans nor to rollovers from a traditional IRA to a Roth IRA, she also noted.
Judson observed that James J. McGovern, Assistant Chief Counsel (Employee Benefits and Exempt Organizations) addressed how the rule applies in the context of payouts by failed financial institutions in a Feb. 5, 1991, letter to the FDIC. McGovern wrote that:
“The legislative history of the Employee Retirement Income Security Act of 1974 (ERISA) indicates that the purpose of the restriction on multiple rollovers of an IRA within a three year (now twelve month) period was to prevent abuse of a system permitting voluntary transfers. Under these circumstances you describe, the distribution is made by an independent quasigovernmental third party acting as a state or federally-appointed receiver for a failed financial institution. The distribution is made due to the insolvency of the custodial institution and the inability of the receiver to find a purchaser for the failed institution. Neither the custodial institution nor the depositor initiates the distribution, and neither the custodial institution nor the depositor can prevent the distribution. We believe this is not the type of transaction that Congress sought to limit through the twelve month restriction”
Judson told Edwards that the office concluded that the same analysis “should apply to the involuntary distributions” he described in his inquiry. “Accordingly,” she continued, “an IRA distribution made from a failed financial institution by the FDIC as receiver is disregarded for purposes of applying the one-rollover-per-year limitation” as long as two conditions are met:
1. neither the failed financial institution nor the depositor initiated the distribution, and
2. no financial institution has assumed the IRAs of the failed financial institution.