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Rollover Foul-Up? IRS Says ‘Chill Out’

The Internal Revenue Service Building, with sign
photo by Ken Lund

If there’s one thing the Internal Revenue Service is not known for, it’s taking a laid-back attitude toward missed deadlines. But in a surprise move, the IRS has effectively told retirement savers not to sweat the small stuff in Revenue Procedure 2016-47.

Specifically, the Service has made it easier for taxpayers who miss the 60-day window to roll over retirement account assets. This being the IRS, there are still plenty of details to consider, but overall this change is taxpayer-friendly and will make life easier for the IRS as well.

When you leave a job that provides a retirement plan, such as a 401(k), you generally have the option to roll over the assets into an IRA or another qualified retirement plan account. You can also withdraw funds from one IRA and deposit the money into another IRA or retirement plan. Once you receive the rollover funds, you have a 60-day period in which to complete the transaction and ensure the funds get deposited into the new retirement account. If you miss the window, the money is considered a distribution, which makes it subject to ordinary income taxes and potentially to early withdrawal penalties, depending on your age.

This sounds simple, but a lot of things can go wrong. A paper check can get lost, either in the mail or in the taxpayer’s home. The taxpayer might get bad advice about how to handle the transfer or suffer a personal loss, such as a death in the family. A lot of taxpayers missed the window – so many, in fact, that Congress granted the IRS the ability to waive the 60-day rule if the delay was not the taxpayer’s fault.

Unfortunately, until recently the only way to get relief for missing the 60-day window was to apply for a private letter ruling from the IRS. This process requires paying the IRS a hefty fee – recently raised to $10,000 – plus the cost of having a tax professional prepare the request. And then the taxpayer has to wait, effectively sitting on the money in question, until the IRS rules on the matter months later. As tax professionals, my colleagues and I would regularly see the IRS release whole batches of private letter rulings granting relief, evidently just rubber-stamping approvals given the volume involved.

In an unexpected but sensible step, the IRS announced that taxpayers can now automatically receive a waiver of the 60-day deadline if they missed it for one of 11 fairly broad reasons. These include misplacing the check or depositing the funds into an account the saver mistakenly believed to be an eligible retirement plan. Taxpayers who meet the requirements can skip the private letter ruling process; instead, they will submit a letter, for which the IRS provides a sample, to the retirement account custodian.

The waiver process is not carte blanche to ignore the 60-day rule. The retirement account custodian must report the letter to the IRS, and the Service can ask for proof the taxpayer qualified if he or she is audited. And the late rollover must be completed within 30 days after the circumstance that prevented the rollover within the original window. In some cases, such as the death of a loved one, it can be ambiguous exactly when the clock starts, so sooner is always better than later. And the rollover has to be valid in the first place – taxpayers should bear in mind that only one IRA to IRA rollover is permitted within a 12-month period, for example.

Overall, the new process will keep a lot of taxpayers from paying a significant price for a retirement rollover error. The idea of an innocent mistake wiping out years of tax-deferred savings is understandably a worst-case scenario for many savers, and Congress’ decision to allow the IRS to waive the penalty suggests that lawmakers do not want situations such as a Post Office error to trigger such a result. Nor did the IRS, in the midst of its own budget and staffing struggles, see much benefit from spending time on large numbers of private letter ruling requests because taxpayers misplaced their checks.

Of course, in many cases taxpayers can avoid any headaches by simply arranging for a direct transfer from one trustee – that is, the financial institution responsible for the retirement account in question – to another. If the assets never pass through the taxpayer’s hands, there is no risk of missing the 60-day window. The IRS itself urged taxpayers to use this direct transfer approach in announcing the new rules.

Rollover mistakes will happen. The new self-certification procedure is a sensible step forward, one that is both taxpayer- and IRS-friendly. It simplifies the process and saves taxpayer money in the form of IRS employees’ time, making this change an easy win for common sense as well as for retirement savers.

Client Service Manager Anthony D. Criscuolo, based out of Atlanta, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 7, “Grandchildren;” Chapter 9, “Life Insurance;” and Chapter 15, “Investment Approaches And Philosophy.”

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