If you change jobs (or plan to one day retire from one), there may come a time when you no longer want to keep your retirement funds in your old employer’s retirement plan. While providers (and employer human resources departments) vary in just how simple or complex they make the process of an IRA rollover for retirement plan account holders, it requires that you complete a series of steps in a specified amount of time to avoid being taxed on the funds withdrawn from an IRA, before retirement age.
If you conduct a direct rollover (your old retirement plan makes payment directly to your new plan) or a trustee- to -trustee transfer, you won’t receive a check made payable to you for the withdrawn funds. But if you do receive an IRA rollover check from your plan in order to move funds from an old account to a new one, the Internal Revenue Service states the money must be deposited into a new IRA account within 60 days from the time funds are issued. Miss that date and you could be on the hook for a significant tax bill.
Though the IRS has long offered an appeals process (called a private letter ruling, or PLR) for taxpayers who miss the 60 day IRA rollover window, it’s not free, easy or quick. The IRS fees alone could cost $10,000 or more, the appeals process can take six to nine months, and you could have to hire a professional to help you navigate the system.
But in late summer 2016, the IRS changed the appeals process for those who miss the 60 day IRA Rollover deadline into one that’s far more user-friendly. In fact, it even allows a number reasons account holders can use to explain why they missed a 60 day IRA rollover deadline in order to avoid the tax implications that follow.
Knowing these new rules (and exceptions to them) could save you thousands of dollars if you attempt to rollover your IRA funds but don’t complete the transaction within the allowable amount of time. Here are the important changes now in effect for IRA rollovers.
A more taxpayer friendly appeals process
Under the new system, taxpayers could avoid a penalty and painful appeals process, provided the explanation for why they missed the deadline is aligned with the excuses the IRS considers acceptable, which include:
- An error made by one of the financial institutions involved in the transfer
- A lost distribution check that has not been cashed by the IRA account owner
- Mistakenly depositing the distribution into an ineligible account
- An incident resulting in serious damage at the taxpayer’s principal residence
- Death of a family member
- Family member of the taxpayer of the taxpayer him or herself becomes seriously ill
- Incarceration of the taxpayer
- Restrictions imposed by a foreign country
- Postal mistake
- A distribution was made to an account of a levy under Section 6331
- Party making the distribution did not get the taxpayer information needed to complete the transaction in a timely manner
Provided a retirement account holder meets one of these qualifications, the IRS provides a sample letter taxpayers can use to complete a self-certification letter they can provide to the appropriate financial institutions notifying them that a rollover that’s past the 60 day deadline still meets the 60 day rollover timeline, under the IRS’ list of exceptions. The new rules assume that the taxpayer will complete the distribution transaction within 30 days of the missed deadline.
Taxpayers who complete the process should maintain records of the self-certification letter if the IRS later disputes or denies the self-certification claim, or initiates an audit. For taxpayers whose self-certification claim isn’t accepted, the PLR process remains in tact as an alternative for making appeals (albeit, far more time consuming and expensive than the self-certification process).