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Distributions from closing banks.

Generally, an individual who receives a distribution from an IRA is not subject to tax on the distribution if he rolls it into another IRA within 60 days of that distribution. Such a tax-free rollover is permitted only once a year.

With the widespread closing of banks and credit unions, the Internal Revenue Service has examined whether this rule would bar the rollover of a series of distributions made to IRA account holders in these closing/closed financial institutions. In several cases, some IRA account holders may receive as many as three different distributions from their IRAs within a one year period. The IRS Employee Plans Ruling Branch looked at the legislative history of ERISA and found that the purpose of the restriction on multiple rollovers of an IRA within a twelve month period was to prevent abuse of a system permitting voluntary transfers. However, in these cases, the failed financial institutions have been taken over by a state or federal agency resulting in the involuntary distribution of IRA assets. Neither the custodial institution nor the depositors initiates the IRA distributions, and neither the custodial institution nor the depositor can prevent the distributions.

The IRS therefore has concluded that roll-overs in these situations are to be permitted without taxable consequences. However, to avoid tax each distribution must still be rollover within the statutory 60 days. A point to note: a direct trustee-to-trustee transfer is not treated as a rollover subject to the one year waiting period, allowing for multiple changes in trustee during the year.

Peter M. Berkery, Jr., Director of Federal Affairs/Tax Counsel and Gary L. Green, Jr., NSPA Staff Tax Analyst
COPYRIGHT 1992 National Society of Public Accountants
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Title Annotation:internal revenue accounts distributions; Tax Talk
Author:Green, Gary L., Jr.; Berkery, Peter M., Jr.
Publication:The National Public Accountant
Date:Feb 1, 1992
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