Tax ARTICLE - IRS Puts Limits on Waivers of 60 Day IRA Rollover Deadline

Six new letter rulings help explain when the IRS will waive the 60 day time period for eligible rollover distributions from individual retirement accounts (IRAs). IRAs rolled over into new IRAs in 60 days will not be included in income as distribution. In three cases, the IRS refused to waive the deadline, because it considered the taxpayers' reasons for failing to make a timely transfer were within their control.

Facts

• The IRS reviews the following factors in their definition of "control":
• Errors committed by a financial institution,
• Inability to complete a rollover due to death, disability, or hospitalization, incarceration, restrictions imposed by a foreign country or postal error,
• Use of amount distributed,
• The time elapsed since the distribution occurred.

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Granted Waivers

A taxpayer, suffering from dementia and other mental health problems, closed an IRA and deposited the funds into a savings account where they remained until her tax preparer discovered them several months later. The taxpayer told the preparer that she did not remember closing the IRA. As a result of the mental health problems and as she did not spend the funds withdrawn from the IRA, the waiver was granted.

A couple wanted to move their IRA savings to a company-funded IRA. The company representative incorrectly advised them that a trustee-to-trustee transfer was unacceptable. Before the 60 day rollover period ended, the husband and wife suffered severe health problems. As a result of their health problems and the inaccurate information they ran out of time to rollover their IRA; the waiver was granted.

A taxpayer wanted to purchase a service credit plan that was qualified under Code Sec. 401(a). A state official told him that this plan could be purchased by using a rollover distribution from an IRA and the plan did not need to be purchased until the next contract date. He was not informed of the 60 day rollover period, which he subsequently missed. The taxpayer relied on inaccurate representation from the state official and the waiver was granted.

Denied Waivers

A taxpayer borrowed from his IRA to cover closing costs of selling his vacation home and purchasing a new one. He deposited the funds into an account upon closing. At the same time, the taxpayer's child was undergoing neuropsychological tests recommended by teachers. The taxpayer requested a waiver of the 60 day rule because his attention was focused on his child's test results. The child's condition preceded the IRA distribution and the taxpayer was able to maintain other financial transactions and received proceeds from the closing costs before the test results. The waiver was denied.

& 3. Two couples were informed that they would need to liquidate assets so their ailing spouses could qualify for Medicaid. Each taxpayer closed out his spouse's IRA to offset the costs of their illnesses, depositing the money in their savings accounts. Before any funds were spent, both ailing wives died. The taxpayers learned that as surviving spouses, they could roll over the IRAs into ones in their own names, but failed to do so before the deadline. Because the husbands were not surviving spouses when the IRAs were closed and the funds were placed in savings accounts vs. IRAs or eligible retirement plans, the waiver was denied.

The consequences of not obtaining a waiver results in an immediate tax on the entire proceeds plus a 10% penalty. Please consult your advisors if you plan on moving proceeds from your IRA and ensure you do so in the allotted 60 day time period.

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