June 26, 2013

A recent IRS ruling serves as a reminder to investors who plan to roll over funds from an IRA. Do it within 60 days.

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By law, a distribution of a traditional IRA is subject to income tax plus a 10 percent penalty if it is withdrawn prematurely. But there is no penalty if the distribution is rolled over into another IRA or eligible retirement plan within 60 days.

The IRS, however, may waive the 60-day rule, with a hardship waiver if not waiving the rule would be against equity or good conscience. The waiver may be granted to individuals under conditions such as casualty, disaster or any other event beyond their reasonable control.

In deciding whether to grant a hardship waiver, the IRS considers several factors, including the time elapsed since the distribution; errors committed by a financial institution; and the inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error.

In a recent case, a woman withdrew funds on Dec. 22, 2011, and contacted her financial institution in early January requesting information about how to roll over the funds. But she waited until March 16, 2012, more than 60 days later, to roll over the funds.

But during the 60-day period, the woman was able to prove that she was under a doctor’s care for several conditions that severely impaired her mental abilities, including her ability to manage her financial affairs. She was even granted a Social Security disability award during the rollover period.

The IRS determined that the information and documentation provided supported the woman’s assertion that her medical condition impaired her ability to manage her financial affairs and granted her the hardship waiver. The facts are shown in private letter ruling (PLR 201315036).

This article was originally posted on June 26, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.