Managing retirement account distributions is like running an obstacle course. IRS rollover rules are rife with costly ways to mess up nest egg moves.
Now, however, the IRS has removed one of those impediments.
The IRS announced on Aug. 24 a new procedure that will help retirement plan owners who miss the 60-day deadline for rolling received retirement money into another plan or IRA.
Tax law says that when you are younger than 59 1/2 and get money from an IRA, 401(k) or other workplace retirement plan, you must put it into another qualified retirement account within 60 days.
Miss this rollover deadline and you’ll owe not only tax on the retirement plan money, but also a 10% penalty on the early withdrawal amount.
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The IRS can waive the 60-day rule in cases where the missed rollover deadline is due to something out of the account owner’s control, such as a death in the family or a natural disaster.
But the taxpayer had to request a private letter ruling from the IRS to avoid the penalty. That process, however, is expensive (a $10,000 fee just to ask for IRS’ opinion) and the taxpayer has to wait for IRS determination.
Now, however, the IRS says it will allow taxpayers who miss the rollover deadline to self-certify that the reason for the oversight is excusable. That applies as long as the reason is 1 of 11 that the agency announced in Revenue Procedure 2016-47. They are:
Once you find the valid reason from the IRS list, then when you do put the early retirement distribution into a new qualified account, you simply submit a letter to that new plan’s custodian noting which reason applies for the late rollover.
The IRS even provides a letter template you can use.
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However, this still is the IRS, so there is another deadline you cannot miss.
The IRS says that you must put your rollover-busting withdrawal into another account “as soon as practicable.” And practicable, according to the IRS ruling, generally is within 30 days after the reason that caused you to miss the original rollover period deadline no longer applies.
Sure, some people will try to push this 30-day limit, too. And if you lost your home in a hurricane, you could still be struggling to take care of daily tasks and not focusing on an IRA rollover for well more than a month.
But for most folks who miss a rollover, this new rule will help them keep their retirement money intact in a new account without having to pay for their calendar oversight.
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