News & Events

IRS Announces New Relief for Late Rollovers

The IRS has released new guidance to help taxpayers avoid taxes and penalties for late rollovers of distributions from employer-sponsored retirement plans and individual retirement accounts (IRAs). Ordinarily, such rollovers must be completed within 60 days to be considered valid. The new guidance establishes a process for taxpayers who miss the 60-day rollover window for any one of 11 different reasons to correct the error.

help, late rollovers

Background
Generally, a taxpayer who wants to roll funds tax free from a workplace retirement plan or IRA into another plan or IRA has two options: (1) Arrange for a direct trustee-to-trustee transfer of the funds (without taking receipt of the money) or (2) take the distribution and deposit it with the new plan or IRA trustee within 60 days.

In the second case, failure to meet the 60-day deadline generally renders the rollover invalid and the distribution taxable. Also, for those under age 59½, an additional 10% penalty will generally apply unless the taxpayer can meet one of a number of narrow exceptions.

Prior to the new guidance, taxpayers had only two avenues of relief for late rollovers. One was an “automatic waiver,” which applies only if the financial institution is at fault. Alternatively, the taxpayer could apply for a private letter ruling from the IRS, but the application fee for a ruling is $10,000.

New self-certification procedure
The new guidance offers a third avenue. It requires no application fee, but the taxpayer must complete the IRS’s model certification letter (or one substantially similar to it) and forward it to the receiving plan or IRA trustee.

In the letter, the taxpayer must certify that he or she missed the 60-day deadline for one of the following 11 specified reasons:

    1. error by a financial institution,
    2. a misplaced distribution check,
    3. the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan,
    4. severe damage to the taxpayer’s principal residence,
    5. death of a taxpayer’s family member,
    6. serious illness of the taxpayer or a family member,
    7. the taxpayer was incarcerated,
    8. restrictions were imposed by a foreign country,
    9. a postal error,
    10. the distribution was made on account of a levy and the proceeds have been returned to the taxpayer,
    11. the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information.

In addition the taxpayer must complete the rollover “as soon as practicable” — usually within 30 days — after the reason for the delay has ceased to apply. Please note that the IRS reserves the right to later challenge the rollover if it determines that the certification was not truthful or that the contribution was not made “as soon as practicable.”

Call us at 401-331-0500 if we can help answer your rollover questions.