Money can be moved from a retirement plan to an IRA or from one IRA to another. The trick is that the transfer must be completed within 60 days. If the transfer isn’t completed, or the money isn’t returned to the original account, within 60 days the account owner must include the entire amount in gross income. If the owner is under age 59 ½, a 10% penalty is added.
Many things can prevent a successful transfer. Someone might have received the wrong account numbers or simply misunderstood what the account owner wanted. Many types of human errors are possible.
Taxpayers who missed the 60-day deadline shouldn’t despair. They still have the option of applying to the IRS for an exemption under Revenue Procedure 2003-16. In this procedure the IRS said it would consider factors such as errors by financial institutions, a taxpayer’s death or disability, the amount distributions, and the time elapsed before an exemption is sought.
The IRS has been generous in granting exemptions under this procedure, granting about 50 taxpayers relief. About a dozen requests for exemptions were denied.
A couple of exemptions were given to taxpayers who weren’t mentally competent. Another taxpayer couldn’t leave his house to make the deadline because of a blizzard. Other rulings involved involuntarily admission to a clinic for substance abuse, bad professional advice, and a spouse’s non-elective hospital admission. One taxpayer thought the IRA distribution was an insurance payout.
To get an exemption, the taxpayer must apply for a private letter ruling. This involves a $95 fee and a fair amount of paperwork, except that a mistake by a financial institution merits an automatic exemption. Most taxpayers need a lawyer or accountant to handle the process. Details are in the IRS Revenue Procedure, which is available at the web site, www.irs.gov.