Rollover Rules Just Got A Bit Easier

Oct 2016

There has long been a hard-and-fast rule that you have 60 days to complete a rollover; no ifs, ands or buts; if you are late, you will pay taxes and possible penalties on what was supposed to be a tax-free transaction. By definition, a rollover is when you take possession of money from a workplace retirement plan or IRA and then deposit it into another IRA or workplace plan.

Last month, the IRS surprised us and made the rules more lenient, which take effect immediately. Under the new procedure, taxpayers can “self-certify” that they qualify for a waiver on being over the 60-day rule, if one or more of 11 circumstances apply as stated in the IRS Revenue Procedure #2016-47. These 11 reasons are:

(a) an error was committed by the financial institution receiving the contribution or
making the distribution on to which the contribution relates;
(b) the distribution, having been made in the form of a check, was misplaced and
never cashed;
(c) the distribution was deposited into and remained in an account that the
taxpayer mistakenly thought was an eligible retirement plan;
(d) the taxpayer’s principal residence was severely damaged;
(e) a member of the taxpayer’s family died;
(f) the taxpayer or a member of the taxpayer’s family was seriously ill;
(g) the taxpayer was incarcerated;
(h) restrictions were imposed by a foreign country;
(i) a postal error occurred;
(j) the distribution was made on account of a levy under §6331 and the proceeds
of the levy have been returned to the taxpayer; or
(k) 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.

To be able to “self-certify” you cannot have had a prior denial by the IRS, and the rollover contribution has to be made as soon as possible after your reason given no longer prevents you from making the rollover contribution.

If you are over the 60-days, you will need to attach a written self-certification letter with the contribution to the IRA custodian or plan administrator. This will allow them to accept your rollover contribution check and code it as a rollover in your account. You must use a word-by-word sample letter issued by the IRS or something very similar. You can go to pages 5 and 6 for a sample copy of the IRS’ letter.

For tax return reporting purposes, the IRS will be modifying form 5498 to allow for a rollover contribution after the 60-day deadline.

A word of caution on IRA rollovers: This new rule does not apply to the once a year rollover rule. A taxpayer is still allowed only one IRA-to-IRA rollover every 12 months.

Even though the IRS is giving us potential relief for late rollovers, we should still utilize a direct trustee-to-trustee transfer whenever available, as the 60-day time limit does not apply to these transactions. With trustee-to-trustee transfers, there is also less record-keeping involved to show the “paper-trail” of the rollover. To give you a common example of a trustee-to-trustee transfer, let’s say you left your employer and your company 401(k) was held at TD Ameritrade. You completed the necessary paperwork to have that account rolled to our IRA held at Fidelity. TD Ameritrade will issue a check made payable to “Fidelity, for the benefit of you” for you to have deposited into your IRA account. Even though a check was issued, since it was made payable to Fidelity, you are not considered as taking possession of the funds, so the 60-day rollover rule would not apply.

While we never want to miss a deadline, especially when it comes to our taxes, it is good to know the rules, and that even the IRS will give us some wiggle room in certain situations!

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