7.9 Rollover of Proceeds From Sale of Property

A lump-sum distribution from a qualified plan may include property, such as non-employer stock; see 7.10 for employer securities. If you plan to roll over the distribution, you may find that a bank or other plan trustee does not want to take the property. You cannot get tax-free rollover treatment by keeping the property and rolling over cash to the new plan. If you sell the property, you may roll over the sale proceeds to a traditional IRA as long as the sale and rollover occur within 60 days of receipt of the distribution. If you roll over all of the proceeds, you do not recognize a gain or loss from the sale; the proceeds are treated as part of the distribution. If you make a partial rollover of sale proceeds, you must report as capital gain the portion of the gain that is allocable to the retained sale proceeds.

If you receive cash and property, and you sell the property but only make a partial rollover, you must designate how much of the rolled-over cash is from the employer distribution and how much from the sale proceeds. The designation must be made by the time for filing your return (plus any extensions) and is irrevocable. If you do not make a timely designation, the IRS will allocate the rollover between cash and sales proceeds on a ratable basis; the allocation will determine tax on the retained amount.

Court Decision

Stock Purchased With Cash Withdrawal Cannot Be Rolled Over

A taxpayer withdrew cash from his Keogh accounts and used most of the net distribution (after withholdings) to buy stock, which was then transferred to an IRA within 60 days of the withdrawal. He treated the entire distribution as a tax-free rollover but the IRS and Tax Court held it was taxable. The transfer of stock to the IRA was not a tax-free rollover; only the cash distribution itself could be rolled over. A negligence penalty was also imposed.

A direct rollover from the Keogh accounts to an IRA would have been tax free; the stock could then have been purchased through the new IRA.

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