IRA Late Rollovers… Are They All Treated the Same?
Section 408(d)(3)(A) of the Internal Revenue Code (the”Code”) provides that you may take a distribution from your individual retirement account (“IRA”) without paying tax IF you roll over the same amount to the IRA within 60 days of the withdrawal. Further, you can only do one rollover a year. Someone may withdraw funds before retirement if they suffer a financial setback or a serious illness, always planning to roll over the amount back to the IRA within 60 days. What happens if you don’t?
Section 408(d)(3)(I) of the Code provides that the IRS can waive the 60 day rollover requirement where the failure would be against equity or good conscience, including casualty, disaster, or other event beyond the reasonable control of the taxpayer.
Two recent private letter rulings (“PLR”) from the Internal Revenue Service (‘IRS”) answered that question differently in each case. In PLR 201542011 the IRS determined that the taxpayer intended to do a rollover and, even though the rollover was late, allowed the late rollover. In PLR 201542010 the IRS determined that the taxpayer did NOT present adequate evidence of intent to roll over and was denied the late rollover.
In PLR 201542011 the taxpayer requested a distribution from her husband’s IRA (she was acting under a valid power of attorney) because of husband’s severe illness. On January 7, 2015 she took the distribution and deposited such amount in a non-IRA savings account. Unfortunately, taxpayer’s husband died on February 11, 2015 (within the 60 days). The taxpayer tried to transfer monies back into the husband’s IRA, but the company refused because husband had died. The taxpayer also asserted that she had not used the funds for any other purpose. If there was no valid rollover, then the amount distributed from husband’s IRA would be fully taxable on their income tax return and, depending on their ages, could also be subject to a 10% penalty. The IRS stated that, based on the information presented, the failure to complete the timely rollover was due to the death of the taxpayer and waived the 60 day rollover period.
In PLR 201542010 the taxpayer requested a distribution from one IRA and intended to roll over the funds to another IRA. Again, the failure to roll over such amount was because of the taxpayer’s death within the 60 day period. The decedent had wired the amount to his checking account. His mother was appointed executrix of his estate and administered and closed the estate. She did not know about the IRA distribution until she received the Form 1099-R issued to the decedent in February of the next year. The IRS did NOT allow the rollover as there was “no documentation signed” by the decedent “showing his intent to establish a rollover IRA”.
ADVICE: If you really need the IRA distributions, then these PLRs indicate that you should document your intent to meet the 60 day rollover time period. If you just want to change providers (for example for better rates of return, unhappiness with your agent, etc.), then direct a trustee to trustee transfer,instead of receiving the distribution and transferring the funds yourself. In the latter case, you may inadvertently run afoul of the 60 day rollover requirements.
New Word of the Week: Tenant at Will.. If you rent a property to someone they are a “tenant”. If the tenant is allowed possession and occupancy without fixed terms (for example as to duration) with your consent the tenancy is “at will”. Such a tenancy can be terminated by either party upon fair notice.
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