Over the years we’ve had clients accidentally miss the 60-day window when attempting to roll over company plans and IRAs, resulting in unintended monetary penalties. There have been some recent IRS changes that could help you avoid similar problems.
When a client takes a distribution from an IRA or other tax-deferred retirement account, IRS regulations require the funds be contributed back within 60 days of receipt. If this 60-day window is missed there are potential monetary penalties as well as tax consequences.
In the past, the remedy for the penalties and taxes associated with a late rollover was a private letter ruling (PLR). The fee for a PLR was as much as $10,000 plus additional fees in 2016. For most, the cost outweighed the benefit and many didn’t bother trying to fix the mistake, even though it meant the withdrawn funds became taxable as ordinary income with a possible early withdrawal penalty to apply as well.
In August, however, the IRS announced a new and significantly expedited process to receive relief and fix a rollover mistake in certain circumstances. According to the new guidelines, if you meet certain requirements, you can avoid penalties by going through what’s known as a “self-certification” process. A taxpayer submits a letter—a model letter is even provided by the IRS—to the new retirement account custodian, checking off that he or she has satisfied at least one of the acceptable excuses for missing the deadline. The new process is supposed to be fast and, best of all, it doesn’t cost a taxpayer anything.
As a caveat, the IRS defines 11 reasons when the self-certification process is acceptable. One example would be if the financial institution receiving the contribution commits an error. Another acceptable reason would be that the distribution check was misplaced and never cashed. The IRS will also grant relief for a death in the taxpayer’s family or if the taxpayer or family member was seriously ill, if the taxpayer was in jail, or in the case of a postal error. These are only a few examples, so if you are taking a distribution from an IRA or other tax-deferred retirement account, it’s a good idea to familiarize yourself with all of the IRS requirements.
It’s also important to remember that the rollover must be a valid rollover in order to qualify for relief. For instance, you still have to abide by the once-per-year IRA rollover rule.
Certainly, clients can avoid the possibility of a late rollover by doing a direct rollover to another plan. Unfortunately, some plans don’t offer direct rollovers, and for any number of reasons clients sometimes prefer to receive the funds themselves.
While an IRA rollover is something you can certainly do on your own, the team at Anderson Retirement Solutions is here to provide assistance in any way we can. Please don’t hesitate to contact us at 888.473.6931 if you’d like to discuss these important issues.
