Ernie Guerriero, CLU®,ChFC®,CEBS,CPCU®,CPC®,CMS,AIF®,RICP®,CPFA
I had a discussion with a producer whose client needed funds, not an emergency, but wanted to use of the funds in an IRA. I thought of this Revenue Procedure and PLR as a reminder of the rules regarding rollovers.
Revenue Procedure (Rev. Proc.) 2003-16 was effective on January 27, 2003. This Rev. Proc. outlined general rules to be eligible for the waiver of the 60-day rollover period, either automatic or through an application to the Internal Revenue Service (IRS). This was welcome guidance to those individuals that have missed the 60-day rollover period trough no fault of their own. For example, if an error is caused by a financial institution, or in the event of a hospitalization, to name a few.
However, the IRS reviews these waivers, in applying the rollover rules, under narrowly defined exceptions. On May 18, 2020 the IRS issues a PLR (202033008) that provides important information as to the insight of the compliance requirements of the 60-day rollover waiver.
In this case addressed in the PLR the taxpayers, upon the advice of their real estate agent, took a distribution from their IRA to purchase a new home. The distribution was temporary as the rollover was to be replaced with cash from the sale of the old home. The real estate agent assured the taxpayers that they could repay the amount back into the IRA at a later time, after the sale of the home, there was no mention of the 60-day limit.
After the sale of the home and after the expiration of the 60 days the taxpayer approached the financial institution with full repayment of the amount distributed. The financial institution refused to accept the payment stating the payment was beyond the 60-day limit.
The taxpayer asserted the failure to make a timely rollover payment was due to the failure of the real estate agent and the financial institution to inform the taxpayers of the 60-day time frame. Unlike a Qualified Plan (under §401(a)), there is no requirement for an IRA custodian to inform taxpayers of the rollover rules, and the failure of the real estate agent does not rise to the level of a financial institution error. (This author has his own opinion about the real estate agent providing such advice that he/she was not licensed to offer). Unfortunately, the taxpayers had to pay taxes on the distribution plus they incurred $10,000 in addition to fees for professional whose service was engaged to request the PLR.
This is an important reminder that clients should seek the advice from licensed professionals with expertise in such matters. Additionally, while the rules and guidelines seem simple, this is a complicated area that should not be taken lightly.