Rolling over an IRA is a financial maneuver fraught with peril. One wrong step and you could be on the hook for a massive tax bill. Miss the 60-day deadline, and you could face a complicated appeals process that could easily cost $20,000 — that is, until now.
On Aug. 24 the IRS changed its appeals process for those who miss the 60-day deadline. Now, with one of 11 excuses — a postal error, for example — and some "self-certification" legwork, you can fix the problem yourself for free.
In one fell swoop, this new guidance will save thousands of IRAs from the harsh bite of needless and accelerated taxation, according to Jeffrey Levine, chief retirement strategist with Ed Slott & Co. Levine answered our questions about the new guidance by email, edited for length and clarity.
Q: First, what’s a 60-day rollover?
A: A 60-day rollover is a process that allows a person to move money indirectly from one retirement account to another, something you might do when switching jobs or retiring, for example. In a typical 60-day rollover, a person will take a distribution from one of their retirement accounts via a check made payable to them personally. Then, within 60 days, they deposit it into another retirement account. This is often accomplished by endorsing the original check over to their receiving retirement account.
Q: What was the old guidance?
A: Prior to Revenue Procedure 2016-47, fixing a rollover that wasn’t completed in time usually required a private letter ruling (PLR) from the IRS. These rulings — almost like mini court cases with the IRS as judge and jury — were always time-consuming and expensive, but they became even more so in February, when the IRS increased its fee to $10,000. Tack on professional fees to prepare the ruling, which could easily run another $10,000,and the total cost to try and fix the problem could easily run $20,000 or more. And if that wasn’t bad enough, you typically had to wait six to nine months to find out the IRS’ decision, with no guarantee of a successful outcome … and no refund in the event of a denial.
Q: What changes under the new guidance?
A: The PLR process will largely be replaced by a self-certification process that will allow people to complete a late 60-day rollover immediately and at no cost, provided they meet certain requirements.
Q: What are the conditions that must be met?
A: Most people primarily need to be concerned with three rules: The late rollover must be due to one of 11 IRS-provided “excuses,” the rollover must be completed as soon as practicable, and a written letter of certification must be provided to the receiving company.
Q: The IRS accepts 11 reasons for the late rollover. What are they?
A: They range from a death or an illness in the family to incarceration … at which point you probably have bigger problems on your hands. Other popular excuses will include financial institution error, a distribution check was misplaced and never cashed, the rollover was accidentally deposited into the wrong account, postal errors and the severe damage of a principal residence.
Q: What else do IRA account owners need to know about the new guidance?
A: The IRS has indicated that they will be adjusting reporting requirements to be alerted when a late 60-day rollover is made. That could draw unwanted scrutiny to a person’s tax return.
The guidance can only allow people to complete late 60-day rollovers of funds that were eligible to be rolled over in the first place. Certain distributions, such as required minimum distributions (RMDs), distributions from non-spouse inherited retirement accounts and distributions in violation of the once-per-year rollover rule can never be rolled over. Simply put, the IRS cannot give a person more time to do something they were prohibited from doing in the first place.
Q: What’s missing from the new guidance?
A: What about relief for people who are given poor advice by a trusted adviser, but not through a financial institution? What if, for instance, a CPA or other adviser unaffiliated with a “financial institution” read the tax code upside-down and told someone that they had 90 days to complete the rollover instead of 60 days? Based on the language in the guidance, it appears this person would not meet any of the 11 IRS-provided acceptable excuses. As such, the only possible remedy would seem to be an expensive and time-consuming PLR. This seems unfair and not in the spirit of what IRS was trying to accomplish.
Q: Is there a way to avoid rollover problems altogether?
A: Yes. Moving money directly from one retirement account to another reduces the potential for error. This can be accomplished by having retirement money sent right from one account to another without ever handling the funds, or by having the distributing company make the check payable to the new retirement account.
11 'excuses' the IRS will take
To self-certify a late 60-day rollover, your delay must be attributable to one of the following:
Financial institution error
You misplaced your rollover check and it was never cashed
You deposited your distribution into an account you thought was a retirement account and it remained there until you completed your rollover
Your principal residence was severely damaged
There was a death in your family
You or one of your family members was seriously ill
You were incarcerated
Restrictions were imposed upon you by a foreign country
A postal error occurred
Your distribution was made on account of an IRS levy and the proceeds of the levy have been returned
Despite reasonable efforts to obtain information, the distributing company did not provide information required by the receiving company
3 conditions that must be met for self-certification
There can be no prior denial by the IRS for a waiver
The reason for the late rollover must be one of 11 reasons listed in the form letter
The funds must be redeposited in an IRA account as soon as practicable “after the reason or reasons no longer prevent the taxpayer from making the contribution.” There is a 30-day safe harbor window to meet the “as soon as practicable” guideline.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at firstname.lastname@example.org.