IRS Waives Rollover Requirement After Institution Error

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

A taxpayer we will call “Jason” opened a Roth 401(k) account in Plan X through his employer on February 23, 2011. Jason’s employment ended in November of that year, and in December 2011, he contacted a member of his financial institution. That employee informed Jason that he could open a Roth IRA and rollover the Roth 401(k) assets from Plan X.

The paperwork was prepared on the employee’s personal computer, and the transaction was completed by telephone with another member of the financial institution. At the end of December 2011, the custodian of Plan X issued a distribution check and sent it directly to the financial institution, which in turn deposited it into an IRA, NOT a Roth IRA as Jason intended.

Jason wasn’t aware of this error for over two years. On February 6, 2014, Jason realized that the distribution was not rolled over into a Roth IRA when he sought to transfer the assets to another brokerage firm. Jason filed Private Letter Ruling (PLR) 201452025, requesting a waiver of the 60-day rollover requirement with respect to the initial distribution from the Roth 401(k).

IRS reviewed the case and ruled that Jason’s failure to accomplish a timely rollover to a Roth IRA was due to errors committed by the two financial institution employees. Those errors caused the Roth 401(k) distribution to be deposited into a Traditional IRA, which was not an eligible retirement plan with respect to the distribution.

IRS thereby waived the 60-day rollover requirement and granted Jason a period of 60 days from the ruling letter’s issuance to contribute the original amount into a Roth IRA.

Moral of the story:
Follow-up is key. Make sure your funds actually end up in the correct account … and the correct type of account. These rulings cost valuable time and money.