Dear Dr. Don,
My IRA came to term in October 2010, and we went to the bank to have it rolled over into another IRA. The banker who helped us accidentally put it into a money market account. We learned of the bank's error when we received a 1099-R form indicating that the money was now taxable and had been distributed.
When we contacted the bank, they indicated that the mistake was on their end, but that they are not able to fix it. It has been two weeks of us arguing with them, and they advised us that we had to take the issue to the Internal Revenue Service with a "private letter ruling." This carries a substantial fee of a minimum of $625, which we don't have. What else can we do besides contacting an attorney?
-- Frank Fiasco
The IRS has provisions for this type of mistake made by a financial institution. There are two scenarios: one where there is an automatic waiver of the 60-day rollover requirement, and another where you do need a private letter ruling. The letter ruling is for situations where the automatic waiver does not apply. Your financial institution is telling you that you don't qualify for the automatic waiver, but they'd also be the first to tell you that they aren't providing you professional tax advice.
I'm not providing you professional tax advice either, but IRS Publication 590, Individual Retirement Arrangements, does list the requirements for the automatic waiver. As you describe the situation, it reads like you should qualify for that waiver. Here are the two scenarios:
Automatic waiver. The 60-day rollover requirement is waived automatically only if all of the following apply:
The financial institution receives the funds on your behalf before the end of the 60-day rollover period.
You followed all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan).
The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution.
The funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period.
It would have been a valid rollover if the financial institution had deposited the funds as instructed.
Other waivers. If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. To apply for a waiver, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. This revenue procedure is generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application. The information is in Revenue Procedure 2011-4 in Internal Revenue Bulletin 2011-1.
Publication 590 goes on to state that the IRS will consider all relevant facts and circumstances in determining whether to grant a waiver, and it includes a list of factors it explicitly considers in granting a waiver.
In your shoes, I'd start out by returning to my financial institution and asking them to spell out why the automatic waiver does not apply. If they are able to do so to your satisfaction, then I think the letter ruling is appropriate. If not, you should discuss this with your state's banking commissioner.
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