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.

Related Articles
  1. Taxes

    Distribution Rules For Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
  2. Retirement

    Combining Your Plan Assets? Not So Fast!

    You might reduce the costs of maintaining more than one account, but you could also be forfeiting tax benefits.
  3. Taxes

    Tax Treatment Of Ineligible IRA Rollovers

    Eager to save for retirement? Learn how to avoid overpayment penalties.
  4. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  5. Investing Basics

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  6. Investing Basics

    6 Reasons Why Dividends Should Be Reinvested

    Learn about the advantages of dividend reinvestment programs and how they may benefit longer-term investors who want to build a position in a company.
  7. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  8. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  9. Investing News

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  10. Savings

    6 Ways to Save Money on Back-to-School Stuff

    Those school-supply lists just keep getting longer each year. Here's how to shop smart.
RELATED TERMS
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  3. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  4. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  5. Self Invested Personal Pension ...

    A tax-efficient retirement savings account available in Great ...
  6. Medigap

    Also called Medicare Supplement Insurance, Medigap is health ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  4. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
  5. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  6. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!