Missing the 60-day rollover deadline for tax-free transfers between retirement accounts can cause considerable problems for a client—in the form of increased tax liability and potential penalties. In the past, the only way to correct a delayed rollover was to go through the long and expensive process of obtaining a private letter ruling (PLR) directly from the IRS. Fortunately, the IRS has recently granted relief in the form of a new self-certification process that can help save clients the time and expense of obtaining a PLR.
Despite this, and while self-certification can prove valuable, clients need to be made aware of the fine print on this potential get out of jail free card—not every late rollover will qualify, and complications may arise even for those that technically do satisfy all IRS criteria.
Qualifying for Self-Certification
Generally, if funds are withdrawn from a client’s IRA or 401(k), those amounts will be subject to tax at the client’s ordinary income tax rate unless they are rolled into another tax-preferred account within 60 days. If a client misses this 60-day deadline and otherwise qualifies to use the self-certification process, he or she can submit a self-certification letter to the plan custodian or administrator (a model letter is available, though a substantially similar letter may also be used) to obtain a waiver.
A client can use the self-certification process if he or she misses the 60-day rollover deadline for one of 11 different reasons. The circumstances that can qualify a taxpayer for a waiver via self-certification include errors made by the financial institution receiving the contribution or making the distribution to which the contribution relates, misplacing the distribution check (so long as it was never cashed) and postal errors.
Further, the taxpayer can qualify if a member of his or her family has died or in the case of severe injury or illness. Severe damage to the client’s principal residence will also cause the taxpayer to qualify.
The self-certification process is also available if a foreign country imposed some sort of restriction that hindered the rollover, or if the distribution was deposited into and remained in an account that the client mistakenly believed was an eligible retirement plan.
There is no fee for using the self-certification procedure, and the client is not required to file anything with the IRS (the client simply reports the rollover as he or she would report any other rollover that occurred during the 60-day window).
The Fine Print
The client must complete the rollover as soon as reasonably practical after the certification letter is provided to the plan custodian or administrator or the reason for the delayed rollover is remedied (a 30-day safe harbor window is available).
The plan custodian or administrator is permitted to accept a client’s self-certification if he or she has no knowledge that the certification is false. However, the plan custodian or administrator is not required to accept the certification even if he or she has no reason to believe that the information provided is false.
Further, the IRS can question the validity of the self-certification during an audit, so the procedure is not fail-safe. As such, the client should keep a copy of the certification letter and any documentation relating to the circumstances that gave rise to the delayed rollover.
While the release of this new procedure for late rollovers implies that the IRS recognizes that a variety of valid reasons can exist to delay a rollover, because the IRS still retains the ability to deny a taxpayer’s self-certification, a trustee-to-trustee rollover is still the safest option for completing a rollover. However, for clients with valid reasons for a delayed rollover, this new procedure can save substantial time and money.
See these additional blog postings on retirement planning by Professors Bloink and Byrnes:
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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