Until now, if you took a distribution from your employer sponsored plan, such as an IRA or 401(k), with the intention of making a 60-day rollover, but missed the deadline, the tax impact could be devastating. In most cases, the rollover would become invalid and you end up with a distribution that counts as a taxable event.
But in a surprising move by the IRS, on August 24th under Revenue Procedure 2016-47, they announced that investors can now self-certify that their late rollover contribution was allowable, given that their reason for missing the rollover deadline was one of the 11 reasons the IRS has outlined.
Listed below are the 11 permissible reasons one can now use if they miss the 60-day deadline:
1. The financial institution in charge made an error during the distribution or upon receiving the contribution.
2. The distribution was made in the form of a check that was never cashed or was lost.
3. The distribution was placed into an account that the taxpayer mistakenly thought was an IRA or retirement account.
4. The taxpayer’s residence was severely damaged.
5. One of the taxpayer’s family members 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 an account of an IRS levy and the proceeds of the levy have been returned to the taxpayer.
11. The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite my reasonable efforts to obtain the information.
This is quite the change from previous IRS requirements for missing the 60-day rollover window. Before the recent change, taxpayers who missed the deadline had to apply for a private letter ruling (PLR), which was a burdensome and expensive process. With a fee of $10,000 for the IRS to even rule on a PLR, plus the costs of a tax professional, this process was nightmarish.
While this new process will make missed rollover windows less of a headache for many people, it does not mean that the IRS has to approve all late rollovers. The late contribution still must be made within 30 days after the reason that prevented it from being timely occurred.
Despite the IRS’s efforts to make the strict rollover process more forgiving, there is still plenty of room for error in the rollover process. To avoid it altogether, taxpayers can also consider a “trustee transfer” – or a direct rollover from one IRA or retirement account to another. The IRS encourages taxpayers to consider a direct transfer over a 60-day rollover, as it can avoid some of the delays and restrictions involved with the rollover process.
As a reminder, when you leave your employer, typically you have four options available, which you may engage in individually or in a combination, each choice offering its own advantages and disadvantages. These options include:
• Leave the money in your former employer’s plan, if permitted;
• Roll over (direct or indirect) the assets to your new employer’s plan, if one is available and rollovers are permitted;
• Roll over (direct or indirect) to an IRA; or
• Cash out the account value
At Walsh & Associates, we’re happy to help you with the trustee-to-trustee transfer process to avoid the hassles of a 60-day rollover. As experienced financial advisors, we’ve already helped many of our clients through the direct transfer process. If you’d like to avoid the 60-day rollover process, do not hesitate to contact us about doing a direct transfer of your own.