Don’t Rely on the Financial Organization (IRA Custodian) to Track Your 60-Day IRA Rollover Period

By Joe Cicchinelli, IRA Technical Expert

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When you receive an IRA distribution that is payable to yourself (a rollover), you have 60 days after you receive the distribution to complete a tax-free rollover. If you don’t complete the rollover within that 60-day period, the IRA distribution is not rollover eligible, which means it’s taxable to you. Furthermore, if you are under age 59 ½ when you took the IRA withdrawal, you will also be hit with an IRS 10% early distribution penalty, unless an exception applies, such as disability, excessive medical expenses, first-time home purchase, and some others. So, keeping track of the 60-day IRA rollover period is important to keep your IRA nest egg growing on a tax-deferred basis and to avoid an unnecessary tax bill.

It’s your job to monitor the 60-day period, not the financial organization that’s holding your IRA funds (known as the IRA custodian). Certainly some IRA custodians, as a customer service, will try to monitor the 60-day period for you, but technically it’s not its job to do that. In fact, not only does the custodian not have to monitor that, it also doesn’t have to tell you about the consequences of not doing a timely rollover (i.e., that you will owe taxes on your IRA distribution).

Some people have learned this rule the hard way. In the process of asking the IRS for more time to do a rollover due to extenuating circumstances (known as a hardship waiver of the 60-day rollover rule), some taxpayers have tried to blame the custodian for failing to tell them about the rule or the tax consequences of not doing the rollover. Unfortunately, the IRS typically has denied their requests because the custodian was under no obligation to tell them about the 60-day rule or the tax consequences of not timely doing a rollover.

However, in some situations, the IRS has waived the 60-day rollover rule due to “custodian error.” In these situations, if the custodian took on the responsibility to inform IRA owners of the rollover rules and didn’t meet that responsibility or gave wrong information, then in some cases, IRS ruled that the custodian’s error warranted extending the 60-day rollover period. But getting a 60-day waiver from the IRS is time consuming and expensive. For you to claim custodian error and get a waiver, the custodian will generally have to admit it made a mistake; which oftentimes it won’t do.

You are really on your own to complete a rollover within 60 days; better yet, use IRA trustee-to-trustee transfers to move your IRA funds, because transfers aren’t subject to the 60-day rule.