IRS Provides Relief for Certain Savers Who Miss Rollover Deadline
The new provision can help people who missed the deadline due to error, illness or other reasons
On Aug. 24, 2016, the Internal Revenue Service (IRS) provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or IRA.
By law, money received by a taxpayer from a 401(k), IRA or other workplace retirement plan must be contributed (i.e., rolled over) to another retirement account within 60 days to avoid immediate taxation. Otherwise, it is considered a distribution subject to regular taxes and, if the taxpayer is under age 59½, a possible 10% early withdrawal penalty. Prior to the IRS announcement, the only way to get relief from the 60-day rollover requirement was to apply to the IRS for what’s known as a private letter ruling, an expensive remedy (there’s a $10,000 filing fee, not counting the fee paid to an accountant or tax advisor to prepare the ruling request) that takes several months to process.
Who qualifies for the new procedure?
Under new Revenue Procedure 2016-47, a taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances applies to them:
- An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
- The distribution, having been made in the form of a check, was misplaced and never cashed.
- The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan.
- The taxpayer’s principal residence was severely damaged.
- A member of the taxpayer’s family died.
- The taxpayer or a member of the taxpayer’s family was seriously ill.
- The taxpayer was incarcerated.
- Restrictions were imposed by a foreign country.
- A postal error occurred.
- The distribution was made on account of a levy under Internal Revenue Code Section 6331, and the proceeds of the levy have been returned to the taxpayer.
- The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information.
How can a taxpayer apply for relief?
To qualify, the taxpayer must submit a model IRS letter (included with the revenue procedure) stating that relief is needed and certifying that the relief is requested for one of the 11 reasons. A copy of this declaration must be given to the IRA trustee or the plan administrator who receives the rollover contribution. The IRA custodian is required to report the letter to the IRS.
One catch is that the taxpayer must usually complete the late rollover within 30 days after the extenuating circumstance is discovered or ends. This can be somewhat ambiguous, as in the case of determining when a serious illness ends.
While the reasons are broad, they only apply if the taxpayer was eligible to do a 60-day rollover to begin with. As a result of a 2014 US Tax Court decision, taxpayers may only do one 60-day IRA rollover every 12 months, no matter how many IRAs they have. Prior to that decision, a taxpayer could do one rollover a year for each IRA.
Rollover or transfer?
In a statement announcing the revenue procedure, the IRS encouraged eligible taxpayers wishing to roll over retirement plan or IRA distributions to instead consider a direct trustee-to-trustee transfer. There is no yearly limitation on the number of trustee-to-trustee transfers that savers can make among retirement plans or IRAs.
Another reason to generally prefer direct transfers between 401(k) accounts is that if taxpayers take a distribution from their 401(k)s, their employers must withhold 20% for taxes, meaning they won’t have the full amount to put into the new account unless they can come up with it from their other savings.
Contact your financial advisor for guidance when considering distribution options from your retirement plan or IRA.
Read more about saving for retirement by Invesco’s experts.
Jon Vogler
Senior Analyst
Retirement Research, Invesco Consulting
Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.
Prior to joining Invesco in 2008, Jon spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.
Jon earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He has a B.A. in History from Rutgers, The State University of New Jersey.
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The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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IRS provides relief for certain savers who miss rollover deadline by Invesco
