Distributions from IRAs or qualified plans are not taxable and not subject to penalty if they are transferred to an eligible retirement plan no later than the 60th day following the day of receipt. A similar rule applies to 403(a) annuity plans, 403(b) tax sheltered annuities, and 457 government plans.
If the rollover is not made within 60 days of receipt, the amount distributed will be subject to income tax and will be subject to a 10% early withdrawal penalty. Unfortunately, mistakes happen and taxpayers sometimes miss the 60 day deadline to complete the rollover.
Relief Available for Missing the 60 Day Rollover Deadline
The IRS may waive the 60 day requirement where the failure to waive the 60 day requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the taxpayer.
New guidance from the IRS provides relief for taxpayers who have a good reason for missing the 60 day deadline. The guidance allows the taxpayer to make a written certification to a plan administrator or IRA custodian that the taxpayer meets the requirements for the IRS to waive the 60 day rule. The IRA custodian or plan administrator may rely on the written certification and treat the rollover as if it was made within the 60 day period. However, the certification is subject to audit by the IRS.
The requirements of the self certification are:
- the IRS must not have denied a previous waiver request with respect to a rollover of all or part of the distribution to which the contribution relates
- the taxpayer must have missed the 60 day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons:
- an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates
- the distribution, having been made in the form of a check, was misplaced and never cashed
- the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan
- the taxpayer’s principal residence was severely damaged
- a member of the taxpayer’s family died
- the taxpayer or a member of the taxpayer’s family was seriously ill
- the taxpayer was incarcerated
- restrictions were imposed by a foreign country
- a postal error occurred
- the distribution was made on account of an IRS levy and the proceeds of the levy were returned to the taxpayer
- the party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information
The contribution must be made to the plan or IRA as soon as practicable after the reason(s) listed in the preceding paragraph no longer prevent the taxpayer from making the contribution. This requirement is automatically satisfied if the contribution is made within 30 days after the reason(s) no longer prevent the taxpayer from making the contribution.
The Self-Certification is Subject to IRS Audit
The IRS may, in audit, consider whether a taxpayer’s contribution meets the requirements for a waiver. For example, the IRS may determine that the requirements for a waiver were not met because of a misstatement in the self-certification, the reason(s) claimed for missing the 60 day deadline did not prevent the taxpayer from completing the rollover within 60 days, or the taxpayer failed to make the contribution as soon as practicable after the reason(s) no longer prevented the taxpayer from making the contribution. If the IRS disallows the waiver, the taxpayer will be subject to tax and penalty on the distribution.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
