By: Kejsi Merkuri and Robert Polans, CPA, MT, PFS, ChFC
Are you planning to roll over your qualified plan or IRA to achieve higher returns, broader investment opportunities, or to reside at a better financial institution? Be careful! There are several things to know before entering the 60-day rollover period to avoid costly tax and penalty situations.
First, there is no 60-day clock for direct trustee-to-trustee transfers. Since the plan recipient never touches the money, the IRS is not concerned with improper use of the funds. This is the safest method for achieving a rollover.
Sometimes, a person has a short-term financial need and the IRA is the only source available for the funds. Once in a twelve-month period, a person can withdraw funds from an IRA, without taxes and penalties, However, the funds must be put back into the same or another IRA within 60 days of receipt. This “once per twelve-month limit” applies across all IRAs owned by that individual.
Once you receive your distribution, the 60-day clock begins counting down. If you fail to meet the 60-day deadline, there are three ways to make a late contribution and avoid additional taxes and penalties; automatic waiver, private letter ruling though the IRS, and a self-certification procedure. The three methods are applicable if the circumstances that prevented the contribution are beyond your control.
Automatic waiver applies when the deadline was missed because the recipient’s financial institution completed the rollover improperly despite receiving the funds within the 60-day rollover deadline. You must have followed the financial institution’s procedures for making IRA rollover deposits and have provided it with adequate instructions.
Private Letter Ruling
A private letter ruling can be submitted along with a $10,000 fee, if you want the IRS to rule on whether you are eligible to make a late rollover. Of the three methods, this is by far the most expensive and time consuming. It can take up to a year for the IRS to respond to the ruling request. An alternative to the private letter ruling is the self-certification process the IRS introduced in Revenue Procedure 2016-47.
Self-certification does not guarantee the IRS will accept the reasons but it is free and fast since it does not require IRS prior approval. Although self-certification is not a waiver from the IRS it can turn a late-rollover situation into a valid rollover (subject to later IRS audit), when the late rollover is caused by one or more of the eleven criteria allowed under Rev. Proc. 2016-47. This Rev. Proc. includes a model letter to be used for the self-certification. However, it may also be rejected for the following reasons:
- There was a material misstatement in the self-certification.
- The reason you missed the 60-day deadline did not prevent you from completing a timely rollover.
- You failed to make the contribution in a timely manner after the reason(s) that prevented the rollover was no longer prevalent.
If your self-certification is rejected upon audit because you do not meet the qualifications, penalties will apply and the distribution will be subject to ordinary income tax and, if you were under age 59 ½, a 10% early-distribution tax. See our previous blog on self-certification.
Some Tips to Help Avoid Penalties and Fees
- Documentation is vital to prove your intent of rolling over the money within the 60 days. Types of documentation can include signed instructions to your financial advisor or correspondence with your attorney confirming the purpose of the withdrawal.
- If you realize you have missed the 60-day deadline and self-certification applies, you must go through the self-certification process and contribute the funds back to the IRA or qualified plan within 30 days.
The Tax Warriors® at Drucker & Scaccetti are always looking out for your best interests. Rolling over funds within this 60-day period of withdrawal is the best way defer taxation and avoid penalties. If you have questions about moving your qualified plan and/or IRA funds, call on us. We’d be glad to help.