The Lawletter Vol 35 No 10, July 8, 2011
The Internal Revenue Code states that "[e]xcept as otherwise provided . . . , any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee." 26 U.S.C. § 408(d)(1). Section 408 of the Code goes on to say that a taxpayer does not have to include in his or her gross income the amount distributed or paid from his or her individual retirement plan if
(i) the entire amount received . . . is paid into an individual retirement account or individual retirement annuity . . . for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or
(ii) the entire amount received . . . is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received[.]
Id. § 408(d)(3)(A). The same rules apply with respect to distributions from a qualified "employees' trust." Id. § 402(c).
The Code provides for discretionary hardship relief from the 60-day limitations period on a tax-free rollover of a distribution from a qualified retirement plan or trust. The 60-day limitations period on making a tax-free rollover from an individual retirement plan can be waived by the Secretary of the Treasury "where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement." Id. §§ 402(c)(3)(B), 408(d)(3)(I). In determining whether to grant a waiver of noncompliance with the 60-day time period for a tax-free rollover, the Internal Revenue Service ("IRS") will consider all relevant facts and circumstances, including
(1) errors committed by a financial institution . . . ; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.
Rev. Proc. 2003‑16 sec. 3.02, 2003‑4 I.R.B. 359, 2003‑1 C.B. 359.
A recent Private Letter Ruling that was issued by the IRS suggests that the Treasury Secretary will waive the 60-day limitations period on making a tax-free rollover of a distribution from a qualified plan or trust if the taxpayer can establish that the rollover in question was untimely because of an error on the part of the taxpayer's financial advisor. I.R.S. Priv. Ltr. Rul. ("P.L.R.") 2011-13-048 (Apr. 1, 2011). In P.L.R. 2011-13-048, the taxpayer represented that she had provided her financial advisor with information showing that she held an amount in a qualified individual retirement account ("IRA") at one financial institution and that she had then relied upon the financial advisor to roll the amount in her existing IRA over into a new qualified IRA at another financial institution. However, instead of establishing a new qualified IRA for the taxpayer, the financial advisor had incorrectly deposited the distribution from the taxpayer's qualified IRA into a non‑IRA account at the second financial institution. The facts of the case also showed that the taxpayer had been advised by her financial advisor that she would receive a better yield by rolling her funds over into a new account with the second financial institution.Based on the information and documentation presented by the taxpayer, the IRS waived the 60‑day rollover requirement with respect to the distribution from the taxpayer's qualified IRA at the first financial institution and granted the taxpayer a period of 60 days from the issuance of the Letter Ruling to contribute the funds in question to a qualified rollover IRA. Id. The IRS's decision in P.L.R. 2011-13-048 illustrates that there are some instances in which the IRS will relieve a taxpayer from his or her inability to timely transfer funds from a qualified retirement plan or trust into another qualified plan or trust, such as where the taxpayer has relied upon a third party with expertise in the field to accomplish the tax-free rollover in a timely manner and the third party has failed to do so.