61 Day Rollover
We have a prospect that took a $25,000 distribution from her IRA in October of 2010 with the intention of replacing the funds within 60 days. She put the money back into her IRA on the 61st day. She was not told until after she put the money back in that she missed the 60 days and that the distribution would be taxable. She got a 1099 reflecting this.
The money is still in her IRA. Wouldn’t she be better off just leaving this money outside of the IRA since it has already been taxed? Since she missed the 60 day rollover timeframe and the distribution was taxed, is the money she put back ($25,000) in considered a contribution to her IRA and subject to annual limitation? Is there a way she can get missed rollover amount back out of her IRA without being subject to prorata distribution rules?
Permalink Submitted by Bruce Steiner on Fri, 2011-03-25 16:38
Under Section 402(c)(3)(B), for distributions after 2001, the IRS has discretion to waive the 60-day deadline “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual ….”
We’ve obtained waivers of the deadline in about a half dozen cases.
The IRS charges a fee of $500 if the amount is under $50,000, $1,500 if it’s at least $50,000 but under $100,000, or $3,000 if it’s $100,000 or more. There will also be a few thousand dollars in legal fees to obtain the waiver.
Your client will have to consider whether it’s worth the cost and effort given the amount involved, as well as whether she thinks she has a reasonable explanation for why she missed the deadline.
You didn’t say when in October she withdrew the money. There is about a 25% chance that the 60th day was a Saturday, a Sunday or a holiday. There have been a few rulings granting waivers in these cases. These rulings did not discuss whether a ruling is required in such cases.
Permalink Submitted by Alan Spross on Fri, 2011-03-25 17:11
If Sec 7503 applies (60th day on weekend, holiday or Wash DC holiday), it does not appear that prospect would have to do anything except report the rollover on line 15 of Form 1040. The 1099R is not a red flag, since all IRA custodians must issue one for a distribution. The question now is whether the custodian will also issue a 5498 for the rollover contribution. If they were not going to issue a 5498 they probably should have refused the rollover. But if 7503 applies, prospect should point it out to the custodian that the 5498 needs to be issued if they do not get one by the end of May.
Permalink Submitted by Sean Phillips on Fri, 2011-03-25 18:21
Thanks for the information. We are not really concerned nor is the client concerned about paying taxes on the missed 60 day period because they had an unusually low income in 2010 which put them in a low tax bracket. My question and concern is more about getting that $25,000 (now basis) back out the IRA. Can she take the $25,000 back out of the IRA and consider it all basis since she just paid tax on it or is it going to be subject to prorata rules? Since she missed the 60 day window is it now considered a $25,000 contribution to her IRA (which is obviously over the $6,000 limit (she is over 50))?
Permalink Submitted by Jose Morales on Fri, 2011-03-25 18:29
If it truly was not eligible for rollover then it must be withdrawn as an excess contribution, along with any earnings attributable to the excess contribuiton. A 1099-R will be issued next year for the excess and earnings.
Permalink Submitted by Alan Spross on Fri, 2011-03-25 18:57
The excess contribution correction would be all basis and not subject to pro rate rules because it must be treated as an excess regular contribution due to not being rollover eligible. If she is eligible for a 6,000 contribution that she has not made, then only 19,000 would be excess and subject to an earnings calculation with the corrective distribution. She could take a deduction for the 6,000 provided her modified AGI is not too high and that would partially offset the tax bill.
Permalink Submitted by Sean Phillips on Fri, 2011-03-25 19:21
Awesome. Thanks your your help!