No IRA Rollover Relief for Taxpayer Who Used IRA Distribution as a Short-Term Loan

08.19.2016

In PLR 201625022, the IRS refused to waive the 60-day rollover requirement for a taxpayer who used her IRA distribution as a short-term source of funds pending the sale of her vacation home.  In general, there is no immediate tax where the distributions from an IRA are rolled over to an IRA or other eligible retirement plan.  For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA.  A distribution rolled over after the 60-day period will be taxed (and also may be subject to a 10 percent premature withdrawal penalty tax).

However, the IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond their reasonable control and not waiving the 60-day rule would be against equity or good conscience.  The IRS will consider several factors in this analysis such as the time elapsed since the distribution and inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error and errors committed by a financial institution.

In the present case, the taxpayer's daughter's home was in foreclosure.  As such, the taxpayer and her spouse put their vacation home up for sale in order to raise funds to purchase their daughter's home.  Prior to the sale of their vacation home and in order to avert foreclosure, the taxpayer took a distribution from her IRA on April 24, 2015.  The distribution was used to purchase her daughter's home on April 27, 2015.

The taxpayer intended to redeposit the distributed amount into her IRA within the 60-day rollover period which ended on June 23, 2015.  Nevertheless, the sale of the vacation home was not completed until July 1, 2015 and the taxpayer did not have sufficient funds available during the 60-day period to complete the rollover.  The taxpayer indicated that her spouse was willing to take a distribution from his IRA within the 60-day period to complete the rollover but that her medical condition prevented this from occurring.  She attempted to complete the rollover once she received the funds from selling the vacation home, but the 60-day period had expired.  Accordingly, the taxpayer requested a waiver of the 60-day requirement.

On balance, the IRS denied the taxpayer’s request for relief.  Although the taxpayer represented that her inability to complete a timely rollover was caused by her medical condition during the 60-day period, the IRS was not convinced in light of her continued work and travels.  Specifically, the IRS found that her failure to complete a timely rollover was instead due to her use of the funds as a short-term loan to purchase her daughter's home which left her unable to recontribute the amount to her IRA until after the sale of her vacation home was completed.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or jgrey@genovaburns.com.

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