You can move wealth from a company pension plan, a 401(k) or traditional individual retirement account into a traditional IRA without owing any taxes in what's known as a "rollover." This is a plain vanilla, rollover - not the conversion of a traditional IRA into a Roth IRA you've heard so much about. (In a conversion, you take money out of a traditional IRA, pay taxes on it, and then deposit it in a Roth, where it grows tax free.) Yet a surprising number of taxpayers make mistakes when doing a simple rollover and end up either paying taxes prematurely or paying an expert like me to help them clear up the mess. (For background reading, see Common IRA Rollover Mistakes.)
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The safest way to do a rollover is through a "trustee-to-trustee" transfer. You fill out some forms and one custodian (say Fidelity Investments) sends your funds to another (say, the Vanguard Group). You never touch the funds.
One thing we have learned from these cases is that to get a favorable ruling from the IRS, the investor must establish that he or she truly intended to roll over the funds in the first place and that the rollover was not a stroke of genius that occurred after he or she belatedly discovered the distribution was taxable or had some other fortuitous event providing cash for a rollover. (In other words, the IRS doesn't look kindly on a taxpayer who takes the money for short-term use and then misses the deadline as he rushes to put it back in the IRA to avoid tax.)
Here's a hypothetical case in which the IRS is likely to be sympathetic, based on its past rulings:
Dan, age 60, wants to move IRA funds from brokerage firm A to brokerage firm B. He receives a check, payable to him, from firm A. He talks to his CPA and to the advisor at firm B and clearly establishes his intention and desire to roll over the funds. Later, on the drive to firm B, with the check in hand, Dan is involved in a car accident, is injured and misses the 60-day deadline.
Here's a hypothetical case where the IRS is likely to be unsympathetic and to turn down the request for a waiver:
Dan, age 60, needs $25,000 to purchase a new boat and takes a distribution from his IRA. He buys the boat knowing the distribution is taxable. Sixty one days later, Dan wins $25,000 in the lottery and is suddenly inspired to roll over the funds into an IRA. Based upon existing rulings, the IRS would issue an adverse ruling to Dan.
The above examples are fairly clear cut. Real life is messier. Plus, good intentions alone won't always save you. The IRS is likely to grant a waiver to protect a taxpayer from a financial institution's mistake. It isn't too sympathetic when taxpayers make mistakes, unless there are extenuating circumstances, such as a taxpayers' advanced age or incapacity.
So for example, in PLR200919071 the IRS denied a waiver to a taxpayer who admitted his failure to complete the rollover in 60 days was because he thought he had 90 days. In PLR 200738027, it turned down relief to a taxpayer whose failure to accomplish the timely rollover was due to mistakenly entering the wrong account number. And in PLR 200736036, it denied relief to a taxpayer who completed the wrong form over the Internet.
This is a difficult area of the tax law with the IRS granting fewer and fewer favorable requests. Perhaps the moral of the story is to always use a "trustee-to-trustee" transfer and to avoid the issue altogether.