Are you in the market for a new home? Or maybe you’re looking to purchase a new car for your daughter or son? Don’t have enough cash for a down payment? No problem. There’s a nice workaround that can provide short-term relief for your immediate need.
Any IRA owner has the ability to withdraw funds from their traditional IRA on a short-term basis. As an IRA owner, you can avoid paying taxes on the distribution by meeting the 60-day rollover rules.
Putting It into Layman’s Terms
So what do the 60-day rollover rules entail? Let’s look at an example. A taxpayer who owns a traditional IRA account decided to withdraw $20,000 from their account on July 2, 2013, to purchase a vehicle. They are expected to sell an old vehicle and use the proceeds to return $20,000 to their IRA.
Under this scenario, the taxpayer has 60 days to return the funds. The time period start the day after the distribution is received (July 3, 2013), and end in 60 calendar days (Aug. 31, 2013). Thus the funds must be returned on or before Aug. 31, 2013. In this case, Aug. 31 is on a Sunday. If day 60 falls on a Sunday or holiday the rule requires the deposit to occur before Sunday or the holiday. The taxpayer is usually not entitled to the extra day to deposit the funds.
This arrangement can only occur once in any 365-day period (not once per calendar year). If the taxpayer has more than one IRA account, each IRA account is entitled to one distribution and subsequent rollover every 365 days. The 365-day count starts from the date of the withdrawal. Because of newer financial regulations, it is advisable to allow a few extra days for the IRA custodian to deposit the funds, especially if a new IRA account will be opened.
What if You Miss the 60-Day Deadline?
If the 60-day requirement is not met, the distribution will be taxable and the funds are not permitted to be deposited into the IRA account. However, the IRS does have some provisions that may allow the rollover under certain limited circumstances. The taxpayer must have suffered a casualty, disaster or other event beyond his reasonable control, and not waiving the 60-day requirement would be against equity or good conscience. Waiver of the rule is allowed by an automatic process or through application to the IRS for a private letter ruling.
The automatic waiver will apply if a financial institution’s error caused the rollover to be untimely. All of the following requirements must be met for the automatic waiver:
- The financial institution received the funds before the 60-day rollover period expired
- The taxpayer followed all the financial institution’s procedures for depositing the funds
- The funds were not deposited into an eligible IRA account within the 60 days due solely to the financial institution’s error
- There would have been a valid rollover if the financial institution had deposited the funds as instructed
- The funds were actually deposited into the eligible IRA account within one year from the beginning of the 60-day rollover period.
As a last resort, the taxpayer can request a private letter ruling from the IRS. The private letter ruling is a technical process and would only be recommended for a significant distribution because of the IRS fees and professional fees involved.
The Best Approach
If you intend to do a 60-day IRA rollover, your best bet is to deposit your funds back into the IRA as soon as possible. Then you should review your accounts and determine that your deposit was completed correctly. If an error is made by a financial institution, immediately discuss the situation with your financial institution and involve your tax advisor in the correction process.
Personal Finance Help
Do you have an impending need for immediate cash? If you’re an IRA account owner, consider your options and investigate your ability to temporarily tap into your IRA. Not sure where to start? Contact Rea & Associates. Our Ohio tax services team can review your IRA, and help you determine how you can gain access to funds and return the funds within the permitted timeframe without having to worry about paying taxes.