Tax Planning for Retirees

Retiree Rollovers to IRAs and Other Plans

Proceeds of Lawsuit Settlement Rolled Over Tax-Free to IRA. – In settlement of a lawsuit, a taxpayer recovered IRA funds lost through the wrongful actions of the IRA trustee and others. The IRS ruled the taxpayer could roll the settlement proceeds over tax-free to another IRA. (Ltr. Rul. 200452053; Ltr. Rul. 200705031.)

However, the IRS denied a rollover for another taxpayer involved in the same settlement because the taxpayer had rolled over funds from the same IRA within the prior one-year period. Consequently, the second rollover would violate the rule allowing an owner only one rollover from the same IRA within a one-year period. (Ltr. Rul. 200452047.) See Chapter 5 of the treatise for a discussion of nontaxable rollovers from IRAs.

Rollover of Employer Stock Not Reversible. – A retiree inadvertently instructed her qualified retirement plan to roll over employer stock to her IRA. She had intended instead to take direct ownership of the stock so she could preserve and defer capital gain tax on its increase in value. The IRS, however, refused to allow her to ignore the rollover and correct her mistake. (Ltr. Rul. 200442032.) See Chapter 2 of the treatise for a discussion of the distribution of employer securities from a qualified retirement plan.

60-Day Rollover Period Not Started By Misaddressed Lost Check. – The 60-day period for rollover of a distribution from a qualified retirement plan to an IRA did not begin running when the plan sent a check to the taxpayer’s financial advisor at the wrong address and the check was lost in the mail. Instead, the 60-day period began running when the plan sent a replacement check. (I. R.C § 402(c)(3)(A), 408(d)(3)(A); Treas. Reg. § 1.408-4(b)(1); Ltr. Rul. 200430031.) Similarly, for a distribution check erroneously sent to the decedent’s estate instead of the surviving spouse. (Ltr. Rul 200722031.)

However, see Priv. Ltr. Ruls. 200447042 and 200406051, both implying that the 60-day rollover period begins with the issuance of the lost check and not with the subsequent replacement check. See Chapters 2 and 5 of the treatise for discussions of nontaxable rollovers from qualified retirement plans and IRAs.

IRS May Waive the 60-Day Rollover Requirement. – Distributions from a qualified retirement plans or IRA will generally be taxable if a retiree does not roll them over to another IRA or qualified retirement plan within 60 days. However, the IRS may waive the 60-day requirement if it would be inequitable or unconscionable not to waive it. The IRS has issued many rulings on the waiver, including the following:

IRS Rulings Waiving the 60-Day Rollover Requirement. – The IRS waived the 60-day rollover requirement in each of the following situations:

1.  A taxpayer suffering from a death in the family mistakenly deposited a distribution in a non-IRA account. (Ltr. Rul. 200417034.) The owner of an IRA died within the 60-day period. (Ltr. Rul. 20074207.) The owner missed the 60-day deadline due to the death of her mother-in-law. (Ltr. Rul. 200716030.) A taxpayer who was ill throughout the 60-day period subsequently died. (Ltr. Rul. 200924056.)

2.  A taxpayer with severe back pain was unable to determine the end of the 60-day period until shortly after it had expired. (Ltr. Rul. 200451039. Similarly, Ltr. Rul. 200804024.)

3.  An IRA trustee failed to retain reinvested funds in the IRA as intended by the taxpayer. (Ltr. Rul. 200451033.)

4.  An unanticipated and unwanted distribution check was lost in the mail. (Ltr. Rul. 200406051.)

5.  A credit union ignored taxpayer’s instructions to place his rollover amount in an IRA and instead invested it in a non-IRA money market account. (Ltr. Rul. 200451040. Similarly, Ltr. Ruls. 200802035 and 200740020.)

6.  A credit union gave the taxpayer the wrong date of expiration of the 60-day rollover period – while the taxpayer was suffering from a severe and painful medical condition. (Ltr. Rul. 200451039.)

7.  A retiree received an unanticipated check from his retirement plan five years after retirement without any explanation of its nature, lost the check, finally determined its nature, and obtained a replacement check. (Ltr. Rul. 200451038.)

8.  The taxpayer arranged for a direct rollover from her employer’s qualified retirement plan to an IRA at her credit union, but her employer and the credit union failed to consummate the rollover and instead sent her checks for the rollover amounts. (Ltr. Rul. 200447051.)

9.  The taxpayer arranged for a direct rollover of stock from his qualified retirement plan to an IRA, but his employer sent the stock to the wrong trustee. (Ltr. Rul. 200447041.) A taxpayer’s plan did not supply a timely written explanation of the 60-day rule. (Ltr. Rul. 200714029.) An employer did not inform the taxpayer that a plan loan had been offset (and the offset could have been rolled over). (Ltr. Rul. 200752038.)

10.  Taxpayer rolled over to an IRA only part of employer stock received from his qualified retirement plan, but would have rolled over all the stock if he had received correct advice from his tax advisor. (Ltr. Rul. 200446031.)

11.  A financial advisor did not mention the 60-day rule, gave erroneous advice, or completed incorrect paperwork. (Ltr. Ruls. 200719015, 200804027, and 200715013.)

12.  A trustee miscalculated and overpaid a required minimum distribution. (Ltr. Rul. 200725039.)

13. A taxpayer missed the 60-day deadline because a third-party financial institution erroneously declined to wire taxpayer’s funds to the IRA trustee.  The taxpayer had used the distributed funds as a bridge loan to acquire a residence. (Ltr. Rul. 200905036.)

14. A financial advisor prepared confusing rollover documents, and the recipient financial institution put the rollover funds into an IRA account but later surreptitiously transferred them to a non-IRA account. (Ltr. Rul. 200904032.)

15. A financial advisor prepared confusing rollover documents, and the recipient financial institution put the rollover funds into an IRA account but later surreptitiously transferred them to a non-IRA account. (Ltr. Rul. 200904032.)

16. A retiree’s mentally unstable spouse procured an IRA distribution by forging the retiree’s signature. (Ltr. Rul. 200929022.)

17. Taxpayer erroneously thought the 60-day period applied to the payment of a distributed note rather than to the note itself. (Ltr. Rul. 200946024.)

18. Taxpayer made a decision over the weekend to roll over an amount to an IRA but was unable to complete the rollover until the bank opened on the following Monday – which was the 61st day after the original distribution. (Ltr. Rul. 200930052.)

IRS Rulings Refusing to Waive the 60-Day Rollover Requirement. – The IRS refused to waive the 60-day requirement in the following situations:

1.  A taxpayer who was not familiar with the rollover rules deposited a distribution in a non-IRA savings account. (Ltr. Rul. 200421003.)

2.  An unemployed person used his IRA distribution to pay personal living expenses. (Ltr. Rul. 200417033.)

3.  A taxpayer used a distribution as, in effect, a temporary loan to purchase real estate. (Ltr. Ruls. 200707160 and 200446030.)

4.  The taxpayer used an IRA distribution to pay the fees of an attorney who advised her to request the distribution. (Ltr. Rul. 200452042.)

5.  The taxpayer wished to transfer to an IRA some real estate acquired by the taxpayer with cash distributed from another IRA (a transfer that would not qualify as a rollover even if consummated within 60 days). (Ltr. Rul. 200647028.)

6.  A taxpayer missed the 60-day deadline because of a heavy work load and family demands.. (Ltr. Rul. 200730024.)

7. A taxpayer removed funds from his IRAs because of concerns about identity theft but did not seek to complete a rollover until many years thereafter. (Ltr. Rul. 200904031.)

8. With insufficient evidence, a taxpayer claimed he erred in making a transfer to a non-IRA account rather than an IRA account.(Ltr. Rul. 200941032.)

9. A physically ill but mentally unimpaired taxpayer claimed to have erroneously deposited an IRA distribution in a non-IRA account. (Ltr. Rul. 200941037.)

10. A tax advisor gave erroneous advice on a non-rollover tax issue but not on any rollover issues (even though resolution of the non-rollover issue clearly influenced an initial decision not to roll over a distribution). (Ltr. Rul. 200617039.)

See Chapters 2 and 5 of the treatise for discussions of nontaxable rollovers from qualified retirement plans and IRAs.

No 60-Day Waiver Merely Because Financial Institution Declines to Provide Information. – The IRS denied a waiver of the 60-day rollover period for a taxpayer who failed to roll over the cash-out of her individual retirement annuity (IRA), The distribution was prompted by the statement of her financial institution (the IRA trustee) that she might obtain a better return by reinvesting. In denying the waiver, the IRS said the financial institution had no obligation to spell out tax consequences of the distribution and, in this case, the institution represented in writing that it was not undertaking any such obligation. (Ltr. Rul. 200809043.)

Compare waivers allowed by the IRS due to failure of employers to provide information on rollover options (since employers have a definite statutory obligation to provide such information). (I.R.C. § 402(f); Ltr. Rul. 200503035; Ltr. Rul. 200453021.) Compare also waivers issued for failure to provide information on rollover options by a financial institution or financial advisor that actually attempted to provide some information on reinvestment considerations. (Ltr. Rul. 200719015; Ltr. Rul. 200505031.)

See Chapters 2 and 5 of the treatise for discussions of nontaxable rollovers from qualified retirement plans and IRAs.

No 60-Day Waiver Due to Taxpayer’s Negligence. – The IRS denied a waiver for a taxpayer who placed on his calendar the wrong expiration date for the 60-day rollover period. To justify its ruling, the IRS cited Rev. Proc. 2003-16, 2003-1 C.B. 359, in which it stated that it would consider all the facts and circumstance in granting a waiver, including some specifically enumerated factors. Inexplicably, the IRS dismissed the waiver request in this private ruling on the narrow ground that the enumerated factors did not apply, without discussing whether other non-enumerated facts and circumstances might be relevant. (Ltr. Rul. 201216049.) See Chapter 5 of the treatise for a discussion of IRA rollovers.

Intervening Property Purchase Invalidates Attempted IRA Rollover. – The IRS ruled that the transfer to an IRA of real estate acquired by the IRA owner with cash distributed from another IRA could not qualify as a tax-free rollover. The rationale of the ruling would appear to apply to any property acquired with cash distributed from an IRA. (Ltr. Rul. 200647028.) See Chapter 5 of the treatise for a discussion of IRA rollovers.

Rollovers of Taxpayer Investment from Qualified Plans to Additional Types of Tax-Favored Plans. – In the past, a taxpayer could make a trustee-to-trustee rollover of his or her investment from one qualified plan to another qualified plan only if the recipient plan was a defined contribution plan that agreed to account separately for the rolled-over investment and related earnings. After 2006, a taxpayer may also make a trustee-to-trustee rollover from a qualified plan to a section 403(b) tax-sheltered annuity (TSA), or to another qualified plan even though it is not a defined benefit plan.

The recipient plan or annuity must provide for separate accounting for the rolled-over investment and related earnings (both pre-rollover and post-rollover earnings). As in the past, the tax law treats the amount rolled over as consisting first of earnings before including investment. (Pension Protection Act of 2006, Pub. L. No. 109-280, § 822(a), (b); I.R.C. § 402(c)(2)(A).) See Chapter 2 of the treatise for a discussion of rollovers of taxpayer investment in retirement plans.

The Trustee of an IRA or Plan Can Refuse to Accept a Rollover. – The trustee of an IRA or other tax-favored retirement plan can refuse to accept a rollover from another IRA or tax-favored retirement plan (unless the terms of the recipient plan or IRA specifically require acceptance of such rollovers). (Bohner v. Commissioner, 143 T.C. No. 11 (2014); Dabney v. Commissioner, T.C. Memo. 2014-108.) See Chapters 2, 4, and 5 of the treatise.

Grant of 60-Day Rollover Waiver for Portion of Distribution Not Used for Personal Purposes. – The IRS generally feels no obligation to provide waivers of the 60-day rollover period for taxpayers who have used IRA or plan distributions for personal expenses or non-IRA investments. However, the IRS has allowed a waiver for the untainted portion of a distribution while denying the waiver for the remainder of the distribution used for personal purposes. (Ltr. Rul. 201439004.) See Chapter 2 of the treatise

Revision of the One-Rollover-Per-Year Rule. – The Tax Court has held that a retiree may make an indirect rollover from one IRA to another only if the retiree has not already made an indirect rollover from an IRA to an IRA (or from a Roth IRA to a Roth IRA) during the preceding one-year period.

This restrictive holding of the Tax Court is inconsistent with the more lenient prior position of the IRS. Under the Service’s prior position, a retiree could not make an indirect rollover of a distribution from an IRA to another IRA if (1) the retiree received a previous distribution from the same IRA during the one-year period preceding the current distribution, and (2) he or she rolled over the previous distribution to an IRA. Nor could a retiree roll over IRA assets a second time if two different IRAs had made successive distributions of those same assets to the retiree during a one-year period.

Unfortunately, the IRS has announced that it will follow the more restrictive one-year rule laid down by the Tax Court for distributions after December 31, 2014. Note, though, that this more restrictive rule applies to distributions from two different IRAs only if each of the distributions occur after 2014. For example, in testing the validity of an indirect rollover of a 2015 distribution from an IRA, the Service does not take into account any indirect rollover of a 2014 distribution from a second IRA to a third IRA. (Bobrow v. Commissioner, T.C. Memo 2014-21; IRS Announcement 2014-15, 2014-16 I.R.B. 973; IRS Announcement 2014-32, 2014-48 I.R.B. 907.) See Chapters 5 and 6 of the treatise.

Multiple Rollovers from a Single Qualified Plan Distribution. – A retiree may make multiple rollovers from a single qualified plan distribution. If the multiple rollovers include a trustee-to-trustee rollover and an indirect 60-day rollover, the retiree must allocate the earnings portion of the distribution first to trustee-to-trustee rollovers. The retiree must allocate any remaining earnings in the distribution to subsequent indirect rollovers, before allocating investment to those indirect rollovers.

A retiree may also make trustee-to-trustee transfers from a qualified plan to both an IRA and another qualified plan, all out of the same distribution. If the retiree does so, and if the total amount rolled over exceeds the earnings in the distribution, the rollovers will include some of the investment in the distribution. In such case, the retiree may allocate the rolled-over investment between the recipient qualified plan and the IRA in any proportion desired. (Notice 2014-54, 2014-41 I.R.B. 670.) See Chapter 2 of the treatise.

Multiple Rollovers from a Single Roth Account Distribution. – A retiree may make trustee-to-trustee rollovers from a non-Roth account (1) to a Roth account in the same plan (taxable) and (2) to a traditional IRA (nontaxable), all out of the same distribution. If the retiree does so, and if the total amount rolled over exceeds the earnings in the distribution, the rollovers will include some of the investment in the distribution.

In such case, the retiree may allocate the rolled-over investment between the recipient Roth account and the IRA in any proportion desired, by so informing the plan administrator before the rollovers. Thus, the retiree may allocate the investment component of the distribution to the rollover to the Roth account to reduce the amount of tax on that rollover. (Notice 2014-54, 2014-41 I.R.B. 670.) See Chapter 7 of the treatise.

Rollovers to Simple IRAs Now Generally Allowed. – A taxpayer may now roll over distributions tax-free into a Simple IRA from other IRAs and tax-favored retirement plans, but only after expiration of the two-year period following the taxpayer’s first participation in a Simple IRA. During the same two-year period, the taxpayer may roll over a distribution from a Simple IRA only to another Simple IRA. (IRC § 408(p)(1)(B).) See Chapter 5 of the treatise.

Self-Certification of Permissible Reasons for Violating the 60-Day Rollover Requirement. – A retiree may be able to give a written certification to an IRA trustee that the he or she has permissible reasons for failing to satisfy the 60-day rollover requirement. The IRA trustee may then accept the rollover contribution despite violation of the 60-day requirement (unless the IRA trustee or plan administrator otherwise knows the rollover is not valid). For this purpose, the IRS has provided a list of permissible reasons for excusing a violation. (Rev. Proc. 2016-47, 2016-37 I.R.B. ___.) See Chapter 5 and Chapter 2 of the treatise.

Judicial Review of IRS Denials of Waivers of the 60-Day Rollover Rule. The Tax Court has held that IRS denials of waivers of the 60-day rollover requirement are subject to judicial review. The court concluded it may reverse an IRS denial of a waiver if it finds the IRS abused its discretion, i.e., acted “arbitrarily, capriciously, or without sound basis in law or fact.” However, the taxpayer must have actually requested the waiver (i.e., by ruling request, self-certification, or during an examination). A court generally will not find the IRS abused its discretion if it did not have an opportunity to exercise its discretion. (Trimmer v. Commissioner, 148 T.C. No. 14 (2017).) See Chapter 5 and Chapter 2 of the treatise.