By law, money received by a taxpayer from an IRA, 401(k), or other workplace retirement plan, must be contributed (i.e. rolled over) to another retirement account within 60 days to escape immediate taxation. Otherwise, it is considered a distribution subject to regular taxes and (if you’re under 59 ½), apossible 10% early withdrawal penalty. That 60 day rule tripped up so many taxpayers, that in 2001 Congress gave the IRS the ability to waive it, if the delay wasn’t a taxpayer’s fault —for example, his house was destroyed, or a financial advisor gave him bum advice about the time he had to do the rollover.
Until today, however, to get 60 day relief, you had to apply to the IRS for what’s known as a private letter ruling. That meant paying the IRS a stiff fee (which rose on January 1, 2016 to a stunning $10,000), plus shelling out another $5,000 to $10,000 for a tax pro to prepare the private letter ruling request. The ruling took six to nine months, and you couldn’t roll the money into a new account until the IRS gave the green light. Even worse, Slott says, a lot of people didn’t even know the letter ruling was an option, and ended up paying a whopping tax bill on their retirement savings and losing potentially decades of tax deferral, because of an innocent mistake.
But in Revenue Procedure 2016-47, both issued and effective today, the IRS has created a new “self-certification” procedure that allows someone who misses the 60 day deadline to avoid the expense and delay of obtaining a private letter ruling. Instead, a taxpayer submits a model IRS letter to the new retirement account custodian, checking in that letter one of 11 acceptable excuses for missing the deadline. This isn’t an unconditional pass—the IRA custodian will report the letter to the IRS and should the taxpayer be audited, the IRS can still determine he didn’t quality for 60 day relief.
But the 11 excuses are pretty inclusive and cover most of the reasons that the IRS has granted private letter relief for in the past. They include an error by a financial institution; a taxpayer misplacing (and never cashing) the retirement account distribution check; and a taxpayer mistakenly putting the check in a taxable account he thought was an eligible retirement account. There’s also lots of dispensation for personal problems, including a death or serious illness in the family; a home being severely damaged; and even a taxpayer being unable to complete the rollover because he was incarcerated.
One catch is that the taxpayer must usually complete the late rollover within 30 days after the circumstance which kept him from making a more timely rollover is discovered or ends. “One of these reasons is because a family member dies. Who’s to say when the 30 days starts? When do you finish grieving?’’ Slott asked. “It’s a little ambiguous. I would get it done as soon as possible,” he added.
While the reasons are broad, they only apply if you were eligible to do a 60 day rollover to begin with. That’s a crucial point, because, as a result of a 2014 U.S. Tax Court decision, taxpayers may only do one 60 day IRA rollover every 12 months, no matter how many IRAs they have. (Before that, you could do one rollover a year for each IRA.)
The safest way to move money from one retirement account to another is to have one trustee (that would be the bank, broker, mutual fund or other financial firm that holds your account) transfer it directly to another trustee. You can do that as many times a year as you want and run no risk of missing the 60 day deadline. In announcing the new self-certification procedure, the IRS urged taxpayers to consider such direct trustee-to-trustee transfers.
Note that IRAs inherited from anyone other than a spouse never qualify for 60 day rollovers; they can be moved only from trustee to trustee and must be carefully retitled as an “inherited IRA” —e.g. “John X. Smith II, deceased, inherited IRA for the benefit of John X Smith III.”
In addition, 401(k) money is almost always best transferred directly from custodian to custodian. That’s because if you take a distribution from your 401(k), your employer must withhold 20% for taxes, meaning you won’t have the full amount to put into the new account unless you can come up with it from your other savings.
Warning: one excuse the IRS won’t allow is that you were using your retirement money as a short term loan for some non-retirement purpose—say, a down payment on a house—and missed the 60 day deadline because of a snag. In its private letter rulings, the IRS has shown little mercy to taxpayers in such situations.