IRS Waives 60-Day IRA Rollover Rule Due to Taxpayer’s Medical Condition

A man we will call “Matt” maintained an IRA with his bank, however, in 2009 his mental capacity began failing. He was diagnosed with vascular dementia, causing him to start arguing and harassing the employees of his bank over the status of his accounts.

In June 2010, Matt was informed by the bank’s attorneys that his accounts would be closed in 30 days and all funds would be distributed. As a result of Matt’s mental illness, he ignored the notice and didn’t realize that checks totaling the IRA’s value were distributed and mailed to him on July 13, 2013. The next month, the checks were discovered by Matt’s spouse, who was not aware that the checks were IRA proceeds.

She deposited the IRA checks and other discovered checks into a non-IRA account with another bank.

Unfortunately, Matt died on June 21, 2012, and the nature of the distribution errors were eventually discovered in November of that year. Matt’s widow received a deficiency notice from the Internal Revenue Service, and she filed Private Letter Ruling (PLR) 201440024 to waive the 60-day rollover requirement due to her now-deceased husband’s mental ailment at the time of the IRA distributions.

She provided documentation from Matt’s former physician that revealed he was suffering from a medical condition at the time of the transactions and was not capable of making sound financial decisions or understanding the consequences of his actions.

IRS found that the information presented and documentation submitted was consistent with the assertation that Matt’s medical condition caused the IRA rollover error. Therefore, they waived the 60-day IRA rollover requirement and granted a period of 60 days from the ruling’s issuance to contribute the distributed amount into a Rollover IRA.

However, IRS also noted that were was no beneficiary named at Matt’s death. Any beneficiary named by Matt’s widow moving forward would NOT be treated as a designated beneficiary of the new IRA.

Points of note:
Matt’s medical condition and supporting documentation made this a fairly straightforward IRS ruling. However, it’s important to note that the new Rollover IRA will not have a designated beneficiary (one who can stretch the IRA over their own life expectancy) since there was no named beneficiary as of Matt’s date of death.