A tax problem often surprising taxpayers is the onerous tax liabilities associated with the receipt of a retirement plan distribution followed by a failure to “roll over” the proceeds to another retirement plan within sixty (60) days. To comply with this seemingly simple rule, a rollover must be completed by the 60th calendar day after the day you receive the distribution from your Individual Retirement Arrangement or company retirement plan. The 60-day period does not start the day the funds leave the retirement account or with the date of the check you receive from the Individual Retirement Arrangement or plan custodian.
A failure to comply with this rule will subject the entire distribution to ordinary income tax treatment, meaning it will be taxed at the taxpayer’s highest rate and beyond. Moreover, if the taxpayer has not attained the age of 59 1/2, he or she will find themselves subjected to an additional ten (10) percent penalty tax.
Historically, the Internal Revenue Service has had the authority to waive the 60-day rollover rule. That relief allowed an extension of the 60-day period in cases where failure to do so would be against equity or good conscience. Unfortunately, to gain this waiver, affected taxpayers were required to request a private letter ruling to get a hardship waiver. That process is extremely expensive and requires taxpayers to pay a fee to the Internal Revenue Service and, likely, also pay a tax professional to prepare the request. The Internal Revenue Service will look at the facts and circumstances of each situation in making the determination.
Obviously, the complexity of seeking a private letter ruling, as well as the cost, often caused taxpayers to simply pay the taxes, especially with respect to smaller distributions. This anomaly has led taxpayers and tax professionals alike to seek some better alternative from the government.
In some good news, on August 24, the Internal Revenue Service 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 individual retirement arrangement.
In Revenue Procedure 2016-47, posted on IRS.gov, the Internal Revenue Service explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or Individual Retirement Arrangement receiving the rollover that they qualify for the waiver.
A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.
Ordinarily, the Internal Revenue Service and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Moreover, even if a taxpayer does not self-certify, the Internal Revenue Service now has the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.
The Internal Revenue Service encourages eligible taxpayers wishing to transfer retirement plan or Individual Retirement Account distributions to another retirement plan or Individual Retirement Arrangement to consider requesting that the administrator or trustee make a direct trustee-to-trustee transfer, rather than doing a rollover. Doing so can avoid some of the delays and restrictions that often arise during the rollover process.
For more information about rollovers and transfers, refer to the following articles: Can You Move Retirement Plan Assets? section in Publication 590-A or the Rollovers of Retirement Plan and IRA Distributions page on IRS.gov.
We concur that direct trustee to trustee rollovers are most often the best option to move these funds without risk of running afoul of these rules. Should you be planning such a distribution, or simply have a question, please contact Bob Grossman or Don Johnston.
