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    The Lawletter Blog

    TAX: Tax-Free Rollover into an Individual Retirement Account

    Posted by Gale Burns on Wed, May 1, 2013 @ 12:05 PM

    The Lawletter Vol 38 No 2

    Brad Pettit, Senior Attorney, National Legal Research Group

    The Internal Revenue Code ("I.R.C.") provides that

    [e]xcept in the case of a rollover contribution described in [§ 408](d)(3) . . . , no contribution [to a qualified individual retirement account or a retirement plan] will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).

    26 U.S.C. § 408(a)(1) (emphasis added).  A key requirement for a "rollover contribution" is that "the entire amount received" by an individual upon a payment or distribution from a retirement account or plan must be "paid into" an individual retirement account, an individual retirement annuity, or an eligible retirement plan for the benefit of the individual "not later than the 60th day after the day on which" the payment or distribution is received.  Id. § 408(d)(3)(A).

    Since we live in an imperfect world, mistakes can be made when an individual seeks to achieve a timely tax-free rollover of money or securities from one tax-favored retirement account or plan into another.  Accordingly, the I.R.C. provides that "[t]he Secretary [of the Treasury] may waive the 60‑day [rollover] requirement under subparagraphs (A) and (D) 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. § 408(d)(3)(I) (emphasis added).  In an administrative ruling, the Internal Revenue Service ("IRS") stated that "a taxpayer must apply for a hardship exception to the 60‑day rollover requirement using the same procedure as that outlined in Rev. Proc. 2003‑4 for letter rulings, accompanied by the user fee set forth in Rev. Proc. 2003‑8."  Rev. Proc. 2003‑16, § 3.01, 2003‑1 C.B. 359 [after clicking on this hyperlink, scroll down to page 359].

    In determining whether to grant a waiver, the Service will consider all relevant facts and circumstances, including:  (1) errors committed by a financial institution, other than as described in Section 3.03 below; (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.

    Id. § 3.02.  According to the IRS, there is an automatic waiver of a defect in an attempt to carry out a tax-free rollover into an IRA, and no formal application for a discretionary waiver is necessary

    if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60‑day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60‑day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60‑day rollover period.

    Id. § 3.03.  But the IRS cautions that "[a]utomatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60‑day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover."  Id.

    In a very recent Private Letter Ruling, the IRS denied a taxpayer's petition for a waiver of a defect in his attempt to roll over a retirement account distribution in the form of a check into an IRA, on the ground that the taxpayer could not establish that any of the factors that are listed in Revenue Procedure 2003-16 were present in his case.  P.L.R. 2012-50-031 (Sept. 19, 2012).  Thus, an individual who seeks to overcome a defect in his or her attempt to achieve a tax-free rollover of funds or securities from one retirement account or plan to another must make sure that the petition to the IRS sets forth facts and circumstances that indicate that a waiver by the IRS of the defect in completing the rollover contribution is justified.

    Topics: legal research, Brad Pettit, tax law, The Lawletter Vol 38 No 2, rollover contribution, tax-free rollover from one plan to another, time requirement, hardship exception, certain circumstances required for waiver to be ju

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