IRS Gets Tough on 'Rollover' Time Limits

Dankdude · #1 08-05-2007, 09:31 AM

By GLENN RUFFENACH
August 5, 2007

More investors are temporarily pulling money from retirement savings for various reasons -- and trying to get the moves classified as "rollovers." Uncle Sam isn't buying it.

One of the biggest mistakes investors make with retirement savings involves the "60-day rule." The Internal Revenue Service generally allows you to roll over funds from one tax-deferred account to another tax-free -- say, when moving your individual retirement account from one financial firm to another -- provided that the funds are deposited in the new account within 60 days. If you miss the deadline, the money withdrawn is subject to immediate taxation, and a 10% penalty if you are under age 59½.

Until recently, the IRS had a soft spot for people who broke the 60-day rule. If a person could show that he or she intended to complete the rollover within the specified period -- but had fallen victim to a bank's error, for example -- then the investor often was given time to complete the transfer without penalty.

More recently, though, says Ed Slott, an IRA consultant in Rockville Centre, N.Y., Uncle Sam has been denying requests for extensions. That's because investors, according to Mr. Slott, are using withdrawals for a variety of purposes and can't prove that "a true intent to do a rollover" existed in the first place. He offers some examples:

Retirement home. A person pulled money from his IRA to buy a retirement home. He assumed that sales of other properties he owned would allow him to replace the IRA funds. When those sales didn't materialize, he applied for a loan -- but 60 days passed before the loan was approved. The IRS denied his request for a waiver to complete the rollover, saying the funds had been used solely as a "short-term, interest-free loan."

Company stock. A person whose company was offering a special stock deal withdrew funds from his IRA to buy shares. He learned -- after 60 days had passed -- that he could have used IRA funds to invest in the stock without withdrawing the money. Saying he had received bad advice, he asked the IRS for additional time to roll the funds back into an IRA. The agency refused, saying the individual was "fully aware of the tax consequences and...had no intention of rolling over the funds."

Medical conditions. A person withdrew money from his IRA and claimed he was unable to complete a rollover within 60 days because of an illness. The IRS denied his request for additional time, noting that he had performed other financial transactions during the two months, including paying bills and making a loan to his daughter. The IRS said he offered no evidence that the illness prevented him from completing the rollover.

The lesson: Using money from a tax-deferred account to cover yourself in a cash crunch or for other short-term purposes is asking for trouble, Mr. Slott says.

If you are moving tax-deferred funds around, the best way -- in almost every instance -- is through a "trustee-to-trustee transfer," in which money moves directly from one financial institution to another. That way, Mr. Slott notes, the 60-day rule doesn't come into play.

IRS Gets Tough on 'Rollover' Time Limits - WSJ.com

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