Rollover Waiver in a War Zone

The tax law permits you to make a withdrawal from a qualified retirement plan and “rollover” the funds to a traditional IRA without any current tax, provided the rollover is completed within 60 days. Otherwise, the distribution is taxable as ordinary income in the year it is received. In addition, if the taxpayer is under age 59 and 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions. .

In the past, the IRS has been adamant about taxpayers complying with the 60-day deadline. However, a “kinder, gentler” IRS is now more likely to grant an exemption due to extenuating circumstances.

The IRS may agree to waive the 60-day requirement if an individual suffers a casualty, disaster or other event beyond his or her reasonable control. In addition, the deadline may be waived if it would be inequitable to not waive it.

IRS ruling: In one exception, the IRS granted a rollover waiver to a private citizen working for a U.S. company in several foreign countries. During the time he was required to complete a rollover from his qualified retirement plan to an IRA, he was working in a war zone. Due to these circumstances, the IRS granted a waiver to the 60-day deadline. It also tacked on an additional 60 days to allow the taxpayer to make at least a partial rollover to the IRA.(IRS Private Letter Ruling 200502052)

Some of the factors the IRS will consider in waiving the rollover deadline are the inability to complete the transaction due to death, disability, hospitalization, incarceration, restrictions imposed by foreign countries, and errors committed by financial institutions or the U.S. Postal Service.

While the trend in recent years has been toward greater leniency, the IRS does deny rollover waiver requests — in one case, for example, an unemployed taxpayer was turned down.

Note:  In any event, a rollover from a qualified plan that is not a direct trustee-to-trustee rollover is subject to automatic 20 percent income tax withholding. Thus, you may have to recoup the withheld tax when you file your tax return for the year of the rollover.

If you think you may be eligible for a rollover waiver, ask your tax adviser about how to apply.

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