As advisers formulate year-end tax strategies, they should familiarize themselves with new rules put out by the
IRS regarding late IRA rollovers.
Nobody should ever have a late rollover if they can help it. Doing so risks incurring a 10% penalty if a taxpayer is younger than 59½ on top of having to pay tax on the amount as if it were ordinary income.
But stuff happens. Given the sheer volume of money in these individual retirement accounts — more than $7 billion by one estimate — there are always going to be reasons why an IRA or 401(k) account was not transferred in a timely manner. A check is lost. An individual becomes sick — or has to go to jail. (Don't laugh. In the eyes of the IRS, those are all valid reasons, along with some others, for taking longer than 60 days to transfer money from one qualified account to another.)
(Related read: Answers to advisers' top questions on IRS' late IRA rollover relief)
In the past, taxpayers had to get a private letter ruling from the IRS to obtain late rollover relief. However, that was expensive — up to $10,000 most recently, not including the cost of preparation. Now the agency has come up with another system for granting late IRA rollover requests that doesn't cost taxpayers anything.
SELF-CERTIFICATION
From now on, taxpayers will be able to write a letter to the financial institution receiving the IRA rollover certifying that it was late for one of the IRS-approved reasons. Taxpayers do not have to notify the IRS directly or indicate anything on their tax forms. The financial institution is charged with notifying the IRS that it received a late rollover.
Advisers should caution clients who are in this situation that there is no guarantee that the IRS is going to grant relief from late rollover penalties just because a self-certification letter is filed. Upon examination, the agency may find the taxpayer was not truthful, and hence reject the letter and impose penalties.
(Related read: IRS more lenient on 60-day rollover)
A surefire way to minimize the chance of a late rollover is to encourage your clients to use a direct rollover. In this case, the financial institution or a plan administrator holding the client's retirement money makes a distribution payment directly to the new institution where the new IRA or 401(k) account will be held. This way, the client never has the chance to delay rolling over the money in the first place.
