A valuable benefit of an employee retirement plan is the ability to "roll over," or deposit, "eligible distributions" from a plan into an Individual Retirement Account without the imposition of income taxes.
This benefit is conferred upon Internal Revenue Code Section 401 cash or deferred plans, Section 403 tax-sheltered annuities and other "qualified" employer-sponsored plans. Once the rollover has occurred, the IRA owner can continue to defer the payment of income taxes on the growth of the tax-deferred assets until mandatory minimum distributions of account assets are required.An "eligible distribution" is typically a lump sum distribution of a portion or all of the employee's retirement plan balance. Here's the catch: The funds received from the plan administrator must be rolled over into the IRA within 60 days of the employee's receipt of the plan distribution. The 60-day rule is absolutely firm and the IRS won't waive the rule even for a mistake.
In a recent case, a taxpayer wanted a partial withdrawal from his retirement plan balance. The taxpayer mistakenly checked the box indicating a complete withdrawal. When the taxpayer received the entire balance, he notified the plan administrator of the mistake and asked if he might return the excess amount to the plan. The plan administrator refused on the grounds that plan rules did not allow for the return of distributions.
The taxpayer challenged the administrator's position, and lost. The process took five months. By this time, the 60-day rollover period had expired, so the taxpayer requested that the Internal Revenue Service waive the 60-day rule. The IRS refused to do so, ruling that that the 60-day rule has no exceptions and that the taxpayer's entire retirement plan balance was taxable. In other words, the taxpayer was treated as having taken a complete distribution of all tax-deferred assets and, consequently, had to pay all the income tax that had been, up to that time, deferred.
The moral of this tale is, carefully monitor the 60-day period, because mistakes won't prevent the IRS from doing what it does best.