Most people are familiar with the concept of tax-free IRA rollovers. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan.
To qualify for tax-free treatment, the amount distributed from the IRA generally must be contributed again to that account or contributed to another eligible account within 60 days. Otherwise, the distribution is usually taxed and may be subject to a 10 percent early withdrawal penalty.
The IRS has the authority to waive the 60-day rule if someone suffers a casualty, disaster or other event beyond that person’s reasonable control. In a recent private letter ruling (PLR 201324022), the IRS agreed to waive the 60-day rule under an unusual set of facts.
In this ruling, a wife represented to the IRS that her husband, an attorney, took a distribution from the wife’s IRA without her knowledge or consent. She argued that her failure to complete the rollover within the 60-day period was due to this fraudulent action on the part of her husband.
A few years after they married and as part of their estate planning, the couple completed power of attorney documents. The wife represented that it was her understanding that the power of attorney was to be used only in situations in which she became incapacitated, disabled or otherwise unable to make her own financial decisions.
When requesting the distribution, the husband told the custodian of the IRA, both orally and in writing, that he was acting pursuant to the power of attorney and that he needed the funds to pay for his wife’s medical expenses. The wife informed the IRS that she did not need the distribution to pay for medical expenses and that her husband gambled and lost the funds he received from her IRA. The husband has since received treatment for his gambling addiction.
The IRS found that the husband’s actions in withdrawing the money without the wife痴 knowledge or consent effectively prevented her from rolling over the distribution within the 60-day period. Therefore, the IRS waived the 60-day rollover requirement.
As with all private letter rulings, only the person requesting the ruling can rely on its contents. Faced with a similar situation, you would have to request your own ruling. However, the IRS is likely to apply similar reasoning in reaching its conclusion.