Tax Article - Waiver of the 60-Day Rollover PeriodBefore 2002, taxpayers who missed the 60-day deadline for rollovers from a qualified plan or Individual Retirement Account (IRA) were out of luck. The law with respect to the 60 day rule was very rigid and the IRS didn’t have the authority to consider equities. Effective for distributions after December 31, 2001, the IRS has discretion to waive the 60 day rule under certain circumstances. Please go to www.irs.gov/ep, select “Plan Participant/Employee,” select “Resources for Retirement Plan Participant/Employee” and see the “IRA Online Resource Guide” to find information on obtaining a waiver of the 60 day rollover requirements. In general, a rollover is a tax-free distribution of cash or other assets from an employer sponsored retirement plan or IRA. This is contributed or “rolled over” to a second retirement plan or IRA. If the rollover contribution is not made by the 60th day after the distribution is received, the recipient is liable for income taxes on the amount withdrawn, plus a 10% additional tax if the recipient is under age 59 ½. Find out how our expertise in Tax Services can add value to your business. Email us or call us at 1 (888) 875-9770. When an employee separates from service with his/her employer or retires and receives a distribution from the employer-sponsored retirement plan, generally the distribution is eligible for rollover to a traditional IRA or to another eligible retirement plan with a different employer. Before making the distribution, the plan must give the recipient a written explanation of rollover treatment, including an explanation of the 60-day rollover rule. Rollovers also can occur between IRAs. Rolling over assets between the same types of IRAs for better investment is a very popular IRA transaction. However, unlike distributions from an employer-sponsored retirement plan, the IRA trustee or custodian is not required to provide a written explanation of rollover treatment or other tax consequences that may occur as a result of the withdrawal from the IRA. As a result, many well-intentioned taxpayers miss the 60-day cutoff date for re-depositing their IRA distributions into another IRA. In many cases the money is re-deposited into a non-IRA by the 60th day after receipt. However, since it was not re-deposited into an IRA, it is not a tax-free rollover. Example An employee, age 55, separates from service with her employer and receives a distribution from her employer-sponsored retirement plan. In accordance with the law, a written explanation of rollover treatment is given before the distribution. After receiving the distribution, she makes a timely rollover into an IRA certificate of deposit (CD) with her local bank. Thirteen months later the IRA CD matures. She researches CD rates and finds that a CD at the bank around the corner is paying a higher interest rate, so she withdraws the money from her IRA CD and purchases a CD at the bank around the corner. This transaction takes place well within the 60-day rollover period. After the 60-day period has expired, she learns that the CD that she purchased was a non-IRA CD and therefore the distribution from her IRA CD is now fully taxable. In addition, since she is under 59 ½, she is also subject to an additional 10% early withdrawal tax. Since IRA trustees and/or custodians are not required by law to explain the rollover options and tax consequences of not rolling over a distribution, it is important for individuals to know the rules and know whether or not their money is going into an IRA or a non-IRA account. In the example, the individual can request a waiver of the 60-day rollover requirement from the IRS. However, the IRS may or may not grant the waiver. The IRS will evaluate the relevant facts and circumstances that caused the individual to miss the 60-day deadline. Relevant facts in the example would include: evidence of the individual’s intent to make a timely rollover, the amount of time that has elapsed since the date she received the distribution, whether the bank deposited her funds into the wrong account, and reliance on the advice of the bank’s employee or agent. Ignorance of the 60-day rollover rule is generally not sufficient justification for the IRS to grant a waiver. The intent of the rollover rules is to promote and protect the portability of retirement assets, not to be loopholes for personal use of tax-deferred assets. Thus, if an individual used the money for a short term loan of any kind, the request for a waiver will be denied. Requests based on miscalculation of the tax consequences or evidence of a lack of timely intent to roll over an eligible distribution could also result in a denial. The IRS will adhere to the criteria provided in Revenue Procedure 2003-16 and is likely to grant a waiver of the 60-day period if an individual is a victim of circumstances reasonably beyond his/her control. The IRS publishes private letter rulings that it issues to individuals in response to requests for a waiver of the 60-day rollover requirements. While these rulings are limited to the individual’s specific facts and circumstance, tax and legal professionals use the published rulings for guidance in drafting future requests and in advising their clients on his/her chances of getting a favorable ruling from the IRS. However, the IRS rationale and policy with respect to denials are seldom published since many individuals exercise their right to withdraw their requests prior to the issuance of a denial or adverse ruling.
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