Early Distribution with Plans for 60 day Rollover
I have a client (birthdate = 11/28/49) who rolled her Thrift Savings Plan Assets into an IRA in 2007. They recently purchased a home (not their first) and need the assets temporarily until their current home sells. They plan to put the assets back in within 60 days when their current home sells. If she rolls the assets back into her IRA within 60 days, will she be able to avoid the 10% penalty and tax?
Permalink Submitted by mk foss on Wed, 2009-04-22 18:10
Yes, there is no tax or penalty if the funds are “rolled back” within 60 days. You need to be careful in counting the 60 days, they start when the check is cut – not when the taxpayer receives it.
Althoough the IRS can waive the 60-day requirement in the case of a hardship, this is exactly the situation where they will NOT allow any additional time. The hardship waivers are for people who intended to do a rollover all of the time and not for those temporarily borrowing IRA funds.
Permalink Submitted by Joseph Arsenault on Wed, 2009-04-22 22:15
The 60 day period actually starts on the day the participant receives the distribution.
§1.402(c)-2
Q-11: If an eligible rollover distribution is paid to an employee, and the employee contributes all or part of the eligible rollover distribution to an eligible retirement plan within 60 days, is the amount contributed not currently includible in gross income?
A-11: Yes, the amount contributed is not currently includible in gross income, provided that it is contributed to the eligible retirement plan no later than the 60th day following the day on which the employee received the distribution. If more than one distribution is received by an employee from a qualified plan during a taxable year, the 60-day rule applies separately to each distribution. Because the amount withheld as income tax under section 3405(c) is considered an amount distributed under section 402(c), an amount equal to all or any portion of the amount withheld can be contributed as a rollover to an eligible retirement plan within the 60-day period, in addition to the net amount of the eligible rollover distribution actually received by the employee. However, if all or any portion of an amount equal to the amount withheld is not contributed as a rollover, it is included in the employee’s gross income to the extent required under section 402(a), and also may be subject to the 10-percent additional income tax under section 72(t). See §1.401(a)(31)-1, Q&A-14, for guidance concerning the qualification of a plan that accepts a rollover contribution.
Permalink Submitted by Alan Spross on Wed, 2009-04-22 23:09
I agree with the conclusion that the receipt date applies, however the IRS Reg. that applies is included in the following link, since the IRA provision supercedes 402(c) with respect to IRA distributions:
http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A…
Also, note that the ability to do this particular 60 day rollover also hinges on not having used up the one rollover per 12 month period in the 12 months prior to the receipt of this particular distribution.
Permalink Submitted by Joseph Arsenault on Thu, 2009-04-23 15:57
Interesting. The Reg i had cited came from a CCH explanation.
Good stuff!
Thanks alan.
Permalink Submitted by mk foss on Thu, 2009-04-23 17:00
It is correct that the 60-day period begins when the funds are received. Unfortunately when custodians are doing the 1099 reporting, they don’t have the receipt date and will code the distribution with a “1” based on the information that they have.
In any case, it’s always best not to count on making the 60 days just under the wire. i’d plan for no more than 55 days outside the IRA.
Permalink Submitted by Joseph Arsenault on Thu, 2009-04-23 17:08
mgtf4cpa ,
Thats a good point, how would you prove the date you received the distribution if questioned by the IRS?
Permalink Submitted by Al Fry on Sun, 2009-04-26 15:29
Have it direct-deposited then use the bank statement and/or online account transaction report.