Rolling over an IRA is a financial maneuver fraught with peril. One wrong step and you could be on the hook for a massive tax bill. Miss the 60-day deadline, and you could face a complicated appeals process that could easily cost $20,000 — that is, until now.
On Aug. 24 the IRS changed its appeals process for people who miss the 60-day deadline. Now, with one of 11 excuses — a postal error, for example — and some “self-certification” legwork, you can fix the problem yourself for free. In one fell swoop, this new guidance will save thousands of IRAs from the harsh bite of needless and accelerated taxation.
The 60-day rollover deadline the time frame for a process that allows a person to move money indirectly from one retirement account to another, something you might do when switching jobs or retiring, for example. In a typical 60-day rollover, a person will take a distribution from one of their retirement accounts via a check made payable to them personally. Then, within 60 days, they deposit it into another retirement account. This is often accomplished by endorsing the original check over to their receiving retirement account.
Prior to Revenue Procedure 2016-47, fixing a rollover that wasn’t completed in time usually required a private letter ruling (PLR) from the IRS. These rulings — almost like mini court cases with the IRS as judge and jury — were always time-consuming and expensive, but they became even more so in February, when the IRS increased its fee to $10,000. Tack on professional fees to prepare the ruling, which could easily run another $10,000, and the total cost to try and fix the problem could easily run $20,000 or more. And if that wasn’t bad enough, you typically had to wait six to nine months to find out the IRS’ decision, with no guarantee of a successful outcome … and no refund in the event of a denial.
Now the PLR process will largely be replaced by a self-certification process that will allow people to complete a late 60-day rollover immediately and at no cost, provided they meet certain requirements.
Most people will primarily need to be concerned with three rules: The late rollover must be due to one of 11 IRS-provided “excuses,” the rollover must be completed as soon as practicable, and a written letter of certification must be provided to the receiving company.
To self-certify a late 60-day rollover, here are the 11 “excuses” for which your delay must be attributable to one of the following:
- Financial institution error
- You misplaced your rollover check and it was never cashed
- You deposited your distribution into an account you thought was a retirement account and it remained there until you completed your rollover
- Your principal residence was severely damaged
- There was a death in your family
- You or one of your family members was seriously ill
- You were incarcerated
- Restrictions were imposed upon you by a foreign country
- A postal error occurred
- Your distribution was made on account of an IRS levy and the proceeds of the levy have been returned
The following are the three criteria to “self-certify”:
- There can be no prior denial by the IRS for a waiver
- The reason for the late rollover must be one of 11 reasons listed in the form letter
- The funds must be redeposited in an IRA account as soon as practicable “after the reason or reasons no longer prevent the taxpayer from making the contribution.” There is a 30-day safe harbor window to meet the “as soon as practicable” guideline.
The guidance can only allow people to complete late 60-day rollovers of funds that were eligible to be rolled over in the first place. Certain distributions, such as required minimum distributions (RMDs), distributions from non-spouse inherited retirement accounts and distributions in violation of the once-per-year rollover rule can never be rolled over. Simply put, the IRS cannot give a person more time to do something they were prohibited from doing in the first place.
However, this new process will not solve all problems. If you are given poor advice, or a CPA or other adviser unaffiliated with a “financial institution” read the tax code upside-down and told someone that they had 90 days to complete the rollover instead of 60 days. You are probably out of luck. Based on the language in the guidance, it appears this person would not meet any of the 11 IRS-provided acceptable excuses. As such, the only possible remedy would seem to be an expensive and time-consuming PLR.
You can, of course, take steps to avoid rollover problems in the first place. By moving money directly from one retirement account to another you reduce the potential for error. This can be accomplished by having retirement money sent right from one account to another without ever handling the funds, or by having the distributing company make the check payable to the new retirement account.
The IRS has provided some relief for a botched IRA roll-over, but the best solution is not to mess up in the first place.