"IRS to the rescue!” is not a phrase you hear too often, but that's exactly what happened for millions of people with retirement accounts. On Aug. 24, the IRS released Revenue Procedure 2016-47, which provides a new and cost-free way for clients to complete a late 60-day rollover of retirement funds using a self-certification procedure. The new procedure is effective now and is available for missed rollover deadlines for both IRAs — including Roth IRAs, SEP IRAs and SIMPLE IRAs — and company plans.
The general rule is that when a client takes a distribution from an IRA (or other tax-deferred retirement account) payable to themselves that they intend to roll over, it must be contributed back to an IRA (or other tax-deferred retirement account) within 60 days. If the funds are not rolled over within 60 days, the consequences are serious. The distribution is taxable, plus there is a potential 10% early distribution penalty (if applicable) and the funds are no longer part of a retirement account.
Prior to the new procedures just issued, fixing the mistake of missing the 60-day rollover deadline was not an easy task. The only way to complete a late 60-day rollover was to obtain a successful private letter ruling request from the IRS. This was always a time-consuming and expensive process, but it became even more expensive in February 2016 when the IRS increased PLR fees for late rollover requests to $10,000. On top of that, there would also be the fees paid to someone to prepare the ruling. As a result, for most clients, late 60-day PLR requests were out of reach — or simply not worth the expense.
AN IMMEDIATE FIX
Thanks to the new IRS guidance, if a client doesn't complete a rollover in time, they may be able to fix the problem quickly, and at no cost. In a majority of cases, it will no longer be necessary to file a PLR and pay a fee to the IRS. A client may now self-certify that they qualify for a waiver of the 60-day rollover period. The IRS has even provided a sample form letter to use as part of the self-certification process.
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For a client to be a candidate for self-certification, there can be no prior denial by the IRS for a waiver; the reason for the late rollover must be one in a list of specific reasons provided by the IRS; and the funds must be redeposited in a retirement 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.
There are 11 acceptable reasons for a late rollover under the self-certification process, including: financial institution or postal error; misplacing and never cashing the check; depositing and keeping the distribution in an account mistakenly thought to be a retirement account; and the distributing company not providing information required by the receiving company, despite reasonable efforts to obtain information.
Other reasons for a late rollover involve personal misfortunes such as severe damage to a principal residence, death of a family member, serious illness or that of a family member, incarceration, restrictions imposed by a foreign country, and an IRS levy where the proceeds have been returned.
Advisers should be aware that this IRS relief only applies to valid rollovers. For example, a second IRA to IRA 60-day rollover within a year would not be covered because it would not be valid under the once-per-year IRA rollover rule.
The client must make a written certification to a plan administrator or an IRA custodian that a contribution satisfies the conditions for a waiver. The client must then redeposit the funds into the IRA. A copy of the certification letter should be kept in the client's records.
Self-certification is not a waiver by the IRS. It allows a client to report a contribution as a valid rollover on their tax return, but the IRS can later audit their return and determine that a waiver was not appropriate. The IRS is planning to modify the instructions to Form 5498 to require that an IRA trustee or custodian who accepts a late rollover with self-certification indicate that it was accepted after the deadline.
Advisers can help clients avoid these rollover problems altogether by using direct, trustee-to-trustee transfers whenever possible as opposed to a check made out personally to the client.
Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at irahelp.com.