Suppose you have an IRA that you’d rolled over from your 401(k) plan.  You become unhappy with the investment results and decide to change IRA custodians.   You know that distributions from an IRA are not taxed if rolled over into another IRA account within 60 days from the date you had received the distribution from the former IRA custodian.   IRA distributions are taxable, however, if not rolled over or re-deposited to a new IRA account within the 60 day grace period; and, may be subject to a 10% early distribution penalty for those under age 59 and ½.

There is a right way and a wrong way to handle an IRA roll over.

THE WRONG WAY

• Telephone your existing IRA custodian and ask it to handle the rollover providing your new account information.

An IRS Private Letter Ruling (PLR 201328036) addresses such a situation. The taxpayer’s instructions were either not received or misunderstood.  Instead of transferring the IRA funds to another IRA account with the new custodian the funds were deposited into a pre-existing non-IRA account at the other bank.  The taxpayer requested a ruling from IRS that the failure to complete the rollover was due to bank error and therefore under IRS Revenue Procedure 2003-16 (2003 CB 359), the late rollover should be excused and the funds not taxed or penalized.

Rev. Proc. 2003-16 states facts that IRS will consider in deciding whether to use its discretion to waive the 60-day rollover rule, namely:

• Where the taxpayer suffers a casualty, disaster or other event beyond his or her reasonable control.
• Where the taxpayer is unable to complete the rollover due to:
  • Death or disability
  • Being hospitalized
  • Being in jail
  • Restrictions imposed by a foreign country
  • Postal errors, or,
  • Financial institution errors

In this case, the woeful taxpayer could not document why the IRA funds were deposited into a pre-existing non-IRA instead of a new IRA account or why she did not notice the error when she’d received her new account bank statements.  Her instructions had been verbal and there was no record to establish exactly what had gone amiss. Thus, she could not prove that the problem was caused by bank error.  Accordingly, IRS ruled it could not waive the 60-day rule and she would be taxed on the distribution.

THE RIGHT WAY

• The taxpayer should have contacted her new IRA custodian and set up the new IRA Rollover account to receive the funds.
• The new custodian bank should then have contacted the other financial institution to implement a bank to bank transfer.
• The taxpayer should also have written a letter to the existing IRA custodian confirming and authorizing the transfer to the new IRA custodian.
• The taxpayer should have examined her first new IRA statement and old IRA closing statement to make sure that the transfer was accomplished properly.

Had she been more careful, the taxpayer would not have needed to seek an IRS ruling asking that the 60-day rollover rule be waived.

© 2013 by Robert S. Steinberg, Esquire
All rights reserved