IRS offers retirement rollover relief

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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.

Rollover or pay the price

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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Reasons for missing a rollover

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:

  1. The financial institution receiving the contribution or making the distribution makes an error.
  2. The distribution was made as a check that was misplaced and never cashed.
  3. The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan,
  4. The taxpayer’s principal residence was severely damaged.
  5. A member of the taxpayer’s family died.
  6. The taxpayer or a member of the taxpayer’s family was seriously ill.
  7. The taxpayer was incarcerated.
  8. Restrictions were imposed by a foreign country.
  9. A postal error occurred.
  10. The distribution was levied and returned to the taxpayer after the rollover deadline.
  11. The party making the distribution did not provide timely information that was required by the receiving plan or IRA to complete the rollover.

Form letter to complete late rollover

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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New 30-day deadline

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.

Keep up with IRS and tax news, as well as find filing tips, calculators and more at Bankrate’s Tax Center.

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