You may know about the 60-day window for making tax-free rollovers of funds withdrawn from your IRA or other tax-favored retirement account. Here are a couple of things you might not know about the deadline:
1. The 60-day period begins the day after you receive funds from the account in question. That can be a beneficial rule because every day counts. (Internal Revenue Code Section 402(c)(3)(A))
2. Unlike most tax deadlines, there is no extension granted if the rollover period ends on a weekend or holiday. So, for example, if the 60-day period ends on a Sunday, the rollover deadline is not extended to the following Monday.
Meeting the deadline is crucial. If you don't complete a rollover within the 60-day window, the withdrawn amount is treated as a taxable distribution to you as the account owner. That is painful enough, but there's more. If this failed rollover happens before you reach age 59 1/2, you may also get hit with the 10 percent premature withdrawal penalty tax. That is doubly painful. In addition, you may owe state income tax.
Although the 60-day rule is well-known, taxpayers still miss it all the time for various reasons. In general, the IRS is unsympathetic, even if you've got a fairly good excuse. However, all may not be lost. The IRS has granted relief for missed rollovers in a tightly defined set of circumstances. (IRS Revenue Procedure 2003-16)
Who Caused the Missed Deadline?
The IRS will automatically waive the 60-day rule when a mistake made by a financial institution causes you to miss the deadline for making a tax-free rollover. However, an automatic waiver is only available when you meet all the criteria listed below:
1. The financial institution received the funds on your behalf before the expiration of the 60-day rollover period.
2. You gave instructions to the financial institution that would have resulted in a successful rollover if they had been followed.
3. Within the 60-day period, you complied with the financial institution's directions for accomplishing a successful rollover.
4. Only because of one or more errors by the financial institution, the funds were not deposited into an eligible retirement account or plan within the 60-day rollover period. In other words, the attempted tax-free rollover failed, and it was the financial institution's fault while you were essentially blameless.
5. Last but definitely not least, you must show that the funds you intended to roll over tax-free were actually deposited into an eligible retirement account or plan within one year from the beginning of the 60-day rollover period. In other words, while you may pass all the other tests necessary to qualify for a waiver of the 60-day rule, you only have a limited time to prove you were absolutely serious about wanting a tax-free rollover. Put another way, the waiver of the 60-day rule is a limited time offer, and you must prove your good intentions within the one-year time frame.
What is a Private Letter Ruling?
A private letter ruling only applies to the specific taxpayer who asks for the written advice. It cannot be relied on as precedent by other taxpayers or IRS personnel. However, the IRS publishes private letter rulings, which taxpayers and their advisers can use as guides to help understand how the agency thinks about a topic. When an individual requests a ruling and pays the appropriate fee, he or she will receive a letter with a decision and the reasons behind it.
Observation: At first blush, these rules may seem almost impossible to take advantage of, but many taxpayers can meet them. The hard part may be proving it to the IRS. If you qualify for relief under the automatic waiver rules, the failed rollover will be declared a tax- free transaction after all.
Another Option: Request a Hardship Waiver
Even if you are ineligible for an automatic waiver, you may still be able to get relief from the 60-day rule on the grounds of hardship. This is done by requesting a private letter ruling (PLR) from the IRS.
Who qualifies for a hardship waiver? The list includes those who fall victim to casualties, disasters and other events beyond their control. In recent years, waivers have been granted to taxpayers filing PLRs for hardships such as illness, the death of a spouse, bad advice from a financial institution and severe weather. The IRS will waive the 60-day rule if not doing so would be against "equity or good conscience."
In applying this standard, the IRS considers all relevant facts and circumstances. (Internal Revenue Code Sections 3.01 and 3.02 of IRS Revenue Procedure 2003-16.)
Conclusion: Obviously, the best way to avoid problems with an intended tax-free retirement account rollover is to complete the transaction within the 60-day window. In addition, it is advisable to conduct rollovers via direct trustee-to-trustee transfers whenever possible. That way, the funds pass through fewer hands, which reduces the chances of something going wrong. However, if the transaction does go off track, it's nice to know you may qualify for relief under the special rules summarized in this article.