The law allows taxpayers to move their IRA retirement funds from one financial institution to another.
These IRA retirement funds include any traditional IRS account and tax-sheltered annuity including 401(k) plans.
There are various reasons that can prompt anyone into moving funds from one institution to another, including higher returns on the funds and other fund-related benefits.
There are two ways that one is allowed to move their funds from one financial institution to another tax-free.
He or she can either make a direct transfer from the institution that currently runs the retirement account to one that he or she wants to transfer the funds to.
If the transfer is done directly, it will not require any IRS reporting or a 20% withholding tax application.
On the other hand, the law also allows for the money from one's retirement funds to be released into his or her personal account for further transferring to the new financial institution of one's choice.
This is called an IRA Rollover and the law provides that you make the transfer from your account to the new financial institution within 60 days.
If an IRA account holder chooses to roll over their funds, a 20% withholding tax is charged and kept by the financial institution that formally held the IRA account.
The transaction also needs to be reported to the IRS to ensure compliance to the 60-day roll over period.
Once the client transfers the funds to the new financial institution within 60 days, the withheld amount is then released to the client.
For example, if one has a $50,000.
00 IRA account with Institution A and wants to transfer the account to Institution B, Institution A will withhold $10,000.
00 (20% withholding) and transfer $40,000.
00 to the client's account.
The client will need to fund the difference of $10,000.
00 and transfer the whole amount of $50,000.
00 within 60 days to qualify for a tax-free roll over.
Once the funds are received by Institution B within 60 days, Institution A the releases the $10,000.
00 to the client.
There are various specific instances that the IRS allows individuals to go beyond the 60 day period and still claim a tax-free roll over.
These instances that allow for waiver of the period are documented in the Rev Proc 2003-16.
The instances include delays caused by errors from either financial institutions or by the postal service, and transfer termination due to incarceration, hospitalization, disability, death, or a restriction that is imposed by a foreign country.
To claim an allowed extension of the 60 days based on the above rules, you will need a hearing with the IRS to determine if the delay was indeed, caused by the aforementioned causes.
There have been cases when a rollover was delayed because the person making the roll over used the funds for a specific reason but was unable to repay funds within the 60 days.
Even if such a person expected funds from elsewhere to be remitted into his or her account within the 60 days (but a delay was beyond his or her control, leading to pass the time limit), the IRS can turn down the request for the tax-free waiver and one may be forced to let go of the 20% withheld tax.
Therefore, one needs to be extra cautious when rolling over, to ensure compliance to the 60 day rule.