MLR

IRS grants waiver of rollover rule for medical reasons

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An IRS private letter ruling waived the rollover requirement for a woman who had withdrawn funds from her individual retirement account but failed to roll them over within the required 60 days because her medical condition had impaired her ability to manage her financial affairs.

A distribution from a traditional IRA may be subject to income tax plus a 10 percent penalty in the case of a premature withdrawal that does not meet a statutory exception. However, no immediate tax or penalty is applied if a taxpayer rolls over a distribution from a traditional IRA to another IRA or other eligible retirement plan within 60 days of having received the distribution.

In general, to accomplish a tax-free rollover, a taxpayer must again contribute the distribution from the traditional IRA to a traditional IRA no later than 60 days after the date that the individual received the withdrawal from the IRA.

The IRS may waive the 60-day rule, called a hardship waiver, if not waiving the rule would be against equity or good conscience. The waiver may be granted to individuals under conditions such as casualty, disaster or any other event beyond their reasonable control.

In deciding whether to grant a hardship waiver, the IRS considers several factors, including the time elapsed since the distribution; errors committed by a financial institution; and the inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error.

The facts as shown in the private letter ruling (PLR 201315036) are as follows:

  • On Dec. 22, 2011, a woman withdrew funds from her IRA.
  • In January 2012, she contacted a financial institution requesting information about how to roll over the distribution, and she received email instructions on Jan. 8, 2012.
  • She did not roll over the funds until March 16, 2012, more than 60 days after she received the withdrawal.

During the 60-day period, the woman was under the care of a doctor for several conditions that severely impaired her mental abilities, including her ability to manage her financial affairs. A doctor examined her during the 60-day period and prescribed medications to treat several medical conditions.

A statement from the doctor said the woman’s medical condition had worsened, resulting in poor judgment, faulty memory, poor concentration and impaired decision-making abilities. In fact, she was granted a Social Security disability award during the rollover period.

The IRS determined that the information and documentation provided supported the woman’s assertion that her ongoing medical condition caused her to fail to roll over the funds in a timely manner. Because her medical condition impaired her ability to manage her financial affairs, the IRS granted the hardship waiver.

A private letter ruling applies only to the specific taxpayer addressed in the ruling. Individuals encountering similar situations may find it advisable to request their own private letter rulings.