New ruling reopens window for taxpayers

The suspension of 2009 required-minimum distributions from retirement plans and IRAs was enacted as part of the Worker, Retiree and Employer Recovery Act of 2008, which was signed into law Dec. 23. Although the distribution requirements were waived for this year, some people were not aware of the tax law change and took distributions anyway. For those who realized the situation within 60 days, the answer was to roll the funds back to an individual retirement account or plan (providing they were eligible) and eliminate the tax bill. Unfortunately, many did not recognize this opportunity until the 60-day window had closed. Though they didn't want to keep the distributions, there apparently was no relief. But a new Internal Revenue Service ruling can help some taxpayers return the unwanted distributions. IRS Notice 2009-82, released Sept. 24, grants a rollover extension. Under the new guidelines, unwanted 2009 distributions already received may be eligible for rollover until Nov. 30 or 60 days after receipt, whichever is later. In general, when a taxpayer receives a distribution from an IRA or qualified retirement account, that distribution is eligible for rollover to another retirement account within 60 days. For years, this deadline was firm, but in 2001, the Economic Growth and Tax Relief Reconciliation Act gave the IRS the ability to extend this deadline. The 2009 RMDs that qualify do not have to go back to the same accounts they came from. In fact, in some cases, particularly with plans, it may be impossible. Who is eligible for relief? Notice 2009-82 affects individuals who normally would have been subject to RMDs from either a company plan or an IRA. Taxpayers receiving annuity payments from a qualified plan calculated over their lives alone, their lives jointly or over a period of at least 10 years also qualify for relief. Is there relief on the once-a-year rollover rule for IRAs? Only one 60-day rollover per 12-month period from each of a taxpayer's IRAs to another IRA is allowed. A 60-day rollover occurs when funds are distributed from the IRA and then re-contributed to an IRA or company plan within 60 days. It is absolutely critical to check with clients and make sure that they have not done any rollovers within the past year. For example, if Mary did a 60-day rollover from her IRA on March 15, 2009, she is not eligible to do another 60-day rollover until March 15, 2010. One complication is that many individuals receive their RMDs in smaller payments throughout the year (i.e., monthly). In many cases, it took several months for the IRA owner to realize that these distributions could be stopped. For these individuals, the new relief may not be as beneficial. A rollover is not determined by how many times IRA funds are put back in, but by how many times they are taken out. For example, John has done no other rollovers within the past year, and received monthly RMD distributions of $10,000 from January to March of this year. He can roll only $10,000 back to his IRA, not $30,000. If he deposits one check for the $30,000, he goes from zero rollovers to three. When the Worker, Retiree and Employer Recovery Act was passed, RMDs were suspended for participants and beneficiaries alike. But the new relief applies only to plan participants and IRA owners. Why? The relief provided by the IRS was made possible by the ability to extend the 60-day rollover window. Under current code, a non-spouse beneficiary can't do a 60-day rollover, and the extension of this period has no effect on them. The one-rollover-per-year rule applies only to distributions made from one IRA to another IRA. Distributions from a company plan rolled over to any eligible account do not count towards this total. So as it turns out, there are two classes of individuals who are eligible for this relief — IRA owners who can roll only one distribution back into an IRA, and plan participants who can roll over all of those that would have been RMDs. Where does that leave IRA owners who have taken multiple distributions and can return only one to an IRA? There are two options: rollovers from IRAs to company plans and conversions of IRA funds to Roth IRAs. Even if the taxpayer did not qualify to convert to a Roth IRA, the funds could be re-characterized. Using either method (the rollover to the plan or the Roth conversion), it appears that the once-per-year rule would not be violated. Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group to help financial advisers and insurance companies become recognized leaders in the IRA marketplace. He can be reached at irahelp.com. For archived columns, go to investmentnews.com/iraalert.