Advanced Underwriting Consultants

Question of the Day – November 3

Ask the Experts!

Here’s the question of the day.

Question: My client has taken a distribution from an IRA, and is nearing the deadline for being able to re-deposit the money tax free under the 60-day rollover rule.  How rigid is the IRS’s deadline?

Answer: A taxpayer may make a 60-day rollover of an eligible rollover distribution if, after receiving the distribution, the amount is deposited into another eligible plan or IRA.  The taxpayer must make the rollover contribution by the 60th day after receiving the eligible rollover distribution.

The IRS may create a special extension to the 60-day requirement in cases where failure to meet the normal deadline is due to circumstances completely out of the control of the taxpayer.  Extensions are not routinely granted.

A recent Private Letter Ruling, PLR 201021040, gives one example where IRS waived the 60-day time period and allowed a deposit after 83 days to be treated as a tax-free rollover where the taxpayer proved he was erroneously advised by his financial advisor that he had 90 days to complete the transaction.

Under the facts of the PLR, Taxpayer A was the owner of an IRA with Custodian C and wished to do a rollover to Custodian D.  Taxpayer A consulted Financial Advisor B and was told he had 90 days to complete the transaction.  Taxpayer A has documentary proof of the erroneous advice given by Financial Advisor B.  In this case, IRS allowed the tax-free rollover even though the deposit into the new account was 83 days after withdrawal from the old account.

The IRS only grants waivers to the 60-day rollover requirement in limited circumstances.  Here’s what IRS itself says about waivers to the 60-day rollover period in Publication 590:

In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:

  • • Whether errors were made by the financial institution,
  • • Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error,
  • • Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check), and
  • • How much time has passed since the date of distribution.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What’s the deadline for my client, who has inherited an IRA from a nonspouse, to elect to stretch out payments from the IRA based on the client’s life expectancy?

Answer: Under Treasury Regulations 1.401(a)(9)-3, a nonspouse beneficiary choosing to take payments based on the life expectancy method must begin payments by the end of the calendar year following the taxpayer’s death.

For nonspouse beneficiaries who inherit an IRA from a decedent who had not yet begun RMDs, the choice is usually between the stretch based on life expectancy, and complete distribution within five years.  Where the beneficiary does not choose the life expectancy method, complete distribution within five years is usually chosen.

The IRS, in Private Letter Ruling 200811028, said that even when a nonspouse beneficiary failed to elect stretch for several years after the taxpayer’s death, the beneficiary could still make a late stretch election.  The beneficiary would have to pay the 50% penalty tax for failure to take the prior RMDs due for the year after the taxpayer’s death and any following years.

Why would the beneficiary voluntarily pay such a hefty tax penalty?  In some cases, the value of preserving the option to pay out the IRA over the beneficiary’s life expectancy—and deferring taxes on those required payments—would more than offset the penalty tax on the undistributed RMDs.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.