New IRS Procedures for 60-day Rollover Requirement Can Provide Taxpayer Relief

Christian Samara (Nov, 2016)

Think of all you could get done in 60 days of time. One possibility that may not be on the top of your list is to complete an Individual Retirement Account (IRA) rollover. Currently, there is no income tax effect if an IRA distribution is properly rolled over, whether that be to the same IRA, another IRA or an eligible retirement plan such as a 401(k). Unfortunately, as I’m sure you are aware life makes a habit of getting in the way and deadlines, even 60-day deadlines can sneak up on you. If the deadline for rolling over your distribution is missed, the distribution becomes taxable and you may even end up paying additional taxes on early distributions. Fortunately, the IRS has established a taxpayer-friendly procedure for seeking relief after missing the 60-day rollover deadline.

An IRA rollover is the process of moving your retirement savings from one retirement account, such as a 401(k), into another retirement account, such as an IRA. This most commonly occurs when an individual changes jobs/retires, when an individual is required to close out their account with the former employer, or when the account holder wants to switch to an IRA with more benefits or better investment choices. In some instances it may be possible to complete a direct rollover, or a trustee-to-trustee transfer, neither of which involve an actual distribution from your retirement account which can be effective ways to avoid worrying about the 60-day deadline. In a 60-day rollover, a distribution from your retirement account will be paid directly to you, which you would then need to deposit into another retirement account within 60 days.

So let’s assume that you receive a distribution from your retirement account and you want to complete a rollover into an IRA. If the distribution is deposited into an IRA or other retirement plan within 60 days there is no income tax effect on the distribution, and the administrator of the new plan may treat it as a rollover contribution. If the 60-day deadline is missed the taxable portion of the distribution will be taxed. The IRS can waive the 60-day rule if the taxpayer suffered a casualty, disaster or other event beyond their reasonable control and if not waiving the 60-day rule would be against good conscience. Unfortunately, obtaining a waiver could prove to be quite the ordeal, costing upwards of $10,000 and taking several months to come to a resolution.

Luckily, thanks to a new revenue procedure effective August 24, 2016, you can now provide a written self-certification to a plan administrator who may rely on the self-certification in determining if you qualify for a waiver of the 60-day deadline. If you do qualify, the plan administrator may accept the contribution as a rollover contribution, saving you from paying tax.

You’re probably thinking that this sounds too good to be true, so what’s the catch? Well, the IRS does have a few conditions you must satisfy before you can qualify with your written self-certification. For starters the IRS must not have previously denied your formal request for a waiver. You also need a good reason for missing the deadline (my dog ate my IRA distribution check wouldn’t have worked in high school and it won’t work now). The IRS lists eleven acceptable reasons for missing the 60-day deadline as follows:

  1. An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
  2. The distribution, having been made in the form of a check, was misplaced and never cashed.
  3. The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan.
  4. The taxpayer’s principal residence was severely damaged.
  5. A member of the taxpayer’s family died.
  6. The taxpayer or a member of the taxpayer’s family was seriously ill.
  7. The taxpayer was incarcerated.
  8. Restrictions were imposed by a foreign country.
  9. A postal error occurred.
  10. The distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer.
  11. The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

Finally, IRS states that the contribution must be made “as soon as practicable” once the reason you missed the deadline no longer prevents you. Making the contribution within 30 days will always satisfy the “as soon as practicable” requirement.

It is very important to note that while functionally the same, the self-certification is not an official waiver of the 60-day requirement. The self-certification is subject to review, and in the course of an examination, if the IRS determines that the requirements for a waiver were not met you could be assessed an income tax deficiency and applicable penalties. The IRS also plans to require IRA trustees to report if they accepted a rollover contribution after the 60-day deadline due to a self-certification. If making a self-certification, it is advisable to keep copies of the self-certification with your tax records.

So if you’re planning to rollover a distribution these new procedures come as good news. It is still advisable to make your rollover as soon as possible, but if life throws a twist at you, it’s always good to know your options. A sample model (which can be used word-for-word) of the written self-certification can be found in the appendix section of the revenue procedure found at https://www.irs.gov/pub/irs-drop/rp-16-47.pdf.

If you have any questions or concerns about your retirement accounts or rollovers, please do not hesitate to contact your Dermody, Burke & Brown advisor. 

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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