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Advisor, Custodian Errors Lead to IRS PLR on IRA to SIMPLE IRA Rollover

IRS ruling advisor IRA rollover mistake

By Beverly DeVeny, IRA Technical Expert

A Taxpayer we will call "Joan" owned both an IRA and a SIMPLE IRA with the same custodian. After a consultation with her financial advisor, she consolidated her IRA and SIMPLE IRA in order to simplify administration and maintenance of the IRAs. The custodian rolled over the funds from the traditional IRA into the SIMPLE IRA via a trustee-to-trustee transfer on January 31, 2008.

"Joan" relied solely on the advice of her financial advisor in performing this rollover. She was not aware that the transfer of funds from her traditional IRA to her SIMPLE IRA was contrary to applicable tax law and could result in the disqualification of her SIMPLE IRA. Her custodian executed the transfer despite the fact that, under the tax law and the terms of the SIMPLE IRA plan drafted by the custodian, a SIMPLE IRA could not accept a rollover or transfer from a traditional IRA.

You know where this is headed. "Joan" reported the erroneous transaction to the IRS through an application to the Service's Voluntary Compliance Program, but upon the Service's advice subsequently withdrew that application and submitted a request for a PLR (private letter ruling).

In PLR 201446036, the IRS found that "Joan" relied on the financial advisor and custodian in advising and executing the transfer and was unaware that such a rollover could result in the disqualification of her SIMPLE IRA. She also failed to timely make the election to recharacterize the contribution to her SIMPLE IRA because she was unaware that the contribution was not permissible until after the election period had expired.

IRS granted her 60 days from the letter date to recharacterize the contribution made to her SIMPLE IRA as a contribution back to her traditional IRA.

The moral of this story is simple. What a bunch of geniuses! Make sure you are working with an educated financial advisor to avoid compounding issues like the ones above.