Background–direct and indi­rect (60-day) rolloversimages

If you’re eli­gi­ble to receive a tax­able dis­tri­b­u­tion from an employ­er-spon­sored retire­ment plan (like a 401(k)) you can avoid cur­rent tax­a­tion by direct­ly rolling the dis­tri­b­u­tion over to anoth­er employ­er plan or IRA (with a direct rollover you nev­er actu­al­ly receive the funds). You can also avoid cur­rent tax­a­tion by actu­al­ly receiv­ing the dis­tri­b­u­tion from the plan, and then rolling it over to anoth­er employ­er plan or IRA with­in 60 days fol­low­ing receipt (a “60-day” or “indi­rect” rollover). But if you choose to receive the funds instead of mak­ing a direct rollover the plan must with­hold 20 per­cent of the tax­able por­tion of your dis­tri­b­u­tion, even if you intend to make a 60-day rollover. (You’ll need to make up those with­held funds from your oth­er assets if you want to roll over the entire amount of your plan dis­tri­b­u­tion.)

Sim­i­lar­ly, if you’re eli­gi­ble to receive a tax­able dis­tri­b­u­tion from an IRA, you can avoid cur­rent tax­a­tion by either trans­fer­ring the funds direct­ly to anoth­er IRA or to an employ­er plan that accepts rollovers (some­times called a “trustee-to-trustee trans­fer”), or by tak­ing the dis­tri­b­u­tion and mak­ing a 60-day indi­rect rollover (20% with­hold­ing does­n’t apply to IRA dis­tri­b­u­tions).

Under recent­ly revised IRS rules you can make only one tax-free, 60-day, rollover from any IRA you own (tra­di­tion­al or Roth) to any oth­er IRA you own in any 12-month peri­od. How­ev­er, this lim­it does not apply to direct rollovers or trustee-to-trustee trans­fers (or to Roth IRA con­ver­sions). Because of the 20% with­hold­ing rule, the one-rollover-per-year rule, and the pos­si­bil­i­ty of miss­ing the 60-day dead­line, in almost all cas­es you’re bet­ter off mak­ing a direct rollover or trustee-to-trustee trans­fer to move your retire­ment plan funds from one account to anoth­er.

 

Excep­tions to the 60-day rollover dead­line
But what hap­pens if you do receive an actu­al dis­tri­b­u­tion from your employ­er plan or IRA and you want to roll over the funds, but you’ve missed the 60 day dead­line? There are lim­it­ed statu­to­ry excep­tions to the 60-day rule. For exam­ple, the time for mak­ing a rollover may be extend­ed for those serv­ing in a com­bat zone or in the event of a pres­i­den­tial­ly declared dis­as­ter or a ter­ror­ist or mil­i­tary action.

But the IRS also has the author­i­ty to waive the 60-day lim­it “where the fail­ure to waive such require­ment would be against equi­ty or good con­science, includ­ing casu­al­ty, dis­as­ter, or oth­er events beyond the [indi­vid­u­al’s] rea­son­able con­trol.” To seek a waiv­er you pre­vi­ous­ly had to request a pri­vate let­ter rul­ing from the IRS. How­ev­er, the IRS has just announced (in Rev­enue Pro­ce­dure 2016–47) a sim­pler alter­na­tive to seek­ing a pri­vate let­ter rul­ing.

 

The new waiv­er alter­na­tive: “self-cer­ti­fi­ca­tion”

Under the new pro­ce­dure, if you want to make a rollover but the 60-day lim­it has expired, you can sim­ply send a let­ter (the Rev­enue Pro­ce­dure con­tains a sam­ple) to the plan admin­is­tra­tor or IRA trustee/custodian cer­ti­fy­ing that you missed the 60-day dead­line due to one of the fol­low­ing  rea­sons:

1. The finan­cial insti­tu­tion receiv­ing the con­tri­bu­tion, or mak­ing the dis­tri­b­u­tion to which the con­tri­bu­tion relates, made an error.
2. You mis­placed and nev­er cashed a dis­tri­b­u­tion made in the form of a check.
3. Your dis­tri­b­u­tion was deposit­ed into and remained in an account that you mis­tak­en­ly thought was an eli­gi­ble retire­ment plan.
4. Your prin­ci­pal res­i­dence was severe­ly dam­aged.
5. A mem­ber of your fam­i­ly died.
6. You or a mem­ber of your fam­i­ly was seri­ous­ly ill.
7. You were incar­cer­at­ed.
8. Restric­tions were imposed by a for­eign coun­try.
9. A postal error occurred.
10. Your dis­tri­b­u­tion was made on account of an IRS tax levy and the pro­ceeds of the levy have been returned to you.
11. The par­ty mak­ing the dis­tri­b­u­tion delayed pro­vid­ing infor­ma­tion that the receiv­ing plan or IRA need­ed to com­plete the rollover, despite your rea­son­able efforts to obtain the infor­ma­tion.

To qual­i­fy for this new pro­ce­dure, you must make your rollover con­tri­bu­tion to the employ­er plan or IRA as soon as prac­ti­ca­ble after the applic­a­ble reason(s) above no longer pre­vent you from doing so. In gen­er­al, a rollover con­tri­bu­tion made with­in 30 days is deemed to sat­is­fy this require­ment.

 

Effect of self-cer­ti­fi­ca­tion

It’s impor­tant to under­stand that this new self-cer­ti­fi­ca­tion process is not an auto­mat­ic waiv­er by the IRS of the 60-day rollover require­ment. The self-cer­ti­fi­ca­tion sim­ply allows you and the finan­cial insti­tu­tion to treat and report the con­tri­bu­tion as a valid rollover. How­ev­er, if you’re sub­se­quent­ly audit­ed, the IRS can still review whether your con­tri­bu­tion met the require­ments for a waiv­er.
For exam­ple, the IRS may deter­mine that the require­ments for a waiv­er were not met because (1) you made a mate­r­i­al mis­state­ment in the self-cer­ti­fi­ca­tion, (2) the reason(s) you claimed for miss­ing the 60-day dead­line did not pre­vent you from com­plet­ing the rollover with­in 60 days fol­low­ing receipt, or (3) you failed to make the con­tri­bu­tion as soon as prac­ti­ca­ble after the reason(s) no longer pre­vent­ed you from mak­ing the con­tri­bu­tion. In that case, you may still be sub­ject to addi­tion­al income tax­es and penal­ties. Because of this poten­tial risk, some tax­pay­ers may still pre­fer the cer­tain­ty of a pri­vate let­ter rul­ing from the IRS waiv­ing the 60-day dead­line, despite the addi­tion­al time and expense involved.

Remem­ber, you can make only one tax-free, 60-day, rollover from any IRA you own (tra­di­tion­al or Roth) to any oth­er IRA you own in any 12-month peri­od. This lim­it does not apply to direct rollovers or trustee-to-trustee trans­fers (or to Roth IRA con­ver­sions).

Also keep in mind that you can gen­er­al­ly leave your funds in a 401(k) or sim­i­lar plan (at least until the plan’s nor­mal retire­ment age) if your vest­ed account bal­ance at the time you ter­mi­nate employ­ment exceeds $5,000.

Con­tent pro­vid­ed by:  Fore­field Advi­sors                                                                                         

Sep­tem­ber 2016