An individual who receives a distribution of assets from a retirement account can avoid applicable taxes and penalties on the amount if he or she rolls it over to an eligible retirement account within 60 days of receipt. There are, however, a few exceptions to this rule. Knowing them can help you avoid paying taxes on rollover-eligible distributions that do not satisfy the 60-day rule, and ensure continued tax-deferred growth on your retirement assets.
Exception for First-Time Homebuyers
Taxable distributions of up to $10,000 from your IRAs are not subject to the 10% additional tax (early-distribution penalty) if the IRA owner or a qualified family member is a first-time homebuyer and, within 120 days of receipt, the IRA owner uses the amount to pay for qualifying acquisition or rebuilding costs for his or her own or qualifying family member's principal residence. If the amount is not used because of a cancellation or delay in the purchase or construction of the residence, the amount may be rolled over to the IRA within 120 days instead of the usual 60 days.
Automatic Waiver for Hardship
An individual may deliver distributed assets to a financial institution and intend the amount be deposited to his or her retirement account as a rollover contribution. Sometimes, because of an error, the amount is not credited to the retirement account within the 60-day period. Such errors can occur if you maintain multiple accounts with your financial institution, and a representative inadvertently deposits the amount to the wrong account, such as your regular checking account. To be sure your instructions are followed, check your account statement for accuracy, and contact your financial institution immediately if you detect any errors. If this happens to you, you receive an automatic extension of the 60-day period, providing all of the following requirements are met:
- The assets were delivered to your financial institution within 60 days after you had received the distribution.
- You followed the procedural requirements for rollover contributions that were established by your financial institution.
- The amount was not deposited to your retirement account because of an error made by the financial institution.
- The assets are deposited to your retirement account within one year after you received the distribution.
- The transaction clearly would have been a valid rollover contribution had the financial institution followed your instructions at the time of receipt.
Non-Automatic Waiver Application
If you are unable to complete your rollover contribution because of certain circumstances beyond your reasonable control, you can submit an application to the IRS for a waiver or extension of the 60-day rule. When reviewing your application, the IRS determines whether you meet certain requirements by considering the following:
- Whether any mistakes were made by your financial institution, other than those described under this article's section "Automatic Waiver for Hardship" above.
- Whether the inability to complete the rollover was the result of death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or a postal error.
- How the distributed amount was used. For instance, if you received a check for the distributed amount, the IRS will want to know whether the check was cashed.
- How long it has been since the distribution occurred.
Additionally, the IRS will look at whether you had any intention of rolling over the distributed amount at the time theo withdrawal occurred. If the IRS determines that you didn't have this intention, your request for waiver may not be approved. Also, before applying for a waiver of the 60-day rule, check to make sure the amount in question is rollover eligible. For instance, if the distribution occurred from an IRA from which another distribution was rolled over during the 12 months preceding the distribution in question, this second distribution is not rollover eligible.
In order to be considered for the waiver, you must submit an application for a private letter ruling (PLR) to the IRS and pay the applicable fee.
After reviewing your application, the IRS will issue a PLR to you indicating whether your application is approved. If it is, it will include the time limit within which the rollover contribution must be completed. If your application is not approved and you already deposited the amount to your retirement account, you may need to remove the amount as a return of excess contribution.
Ensuring Correct Reporting
If a cancellation or delay in the purchase or construction of a first home is the reason you didn't use the distributed amount within 120 days for first-home costs, you were eligible for the automatic waiver within one year of the distribution, or your application for extension to the IRS was approved, you must report the amount of the exception on your tax return as nontaxable to exclude the amount from your income and avoid the penalty. This is done by including the amount on the applicable line of your tax return.
If you have failed to roll over the amount within the 60-day period and don't qualify for these exceptions, you must include any taxable amount of the distribution as income, and pay the applicable taxes.
The Bottom Line
Consult with your tax professional for assistance with determining the taxable portion of your distribution and including the amount on your tax return. Your tax or legal professional should also be able to help you with determining your waiver eligibility and the application process.
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