IRS Details Waiver of 60-Day 401k Rollover Rule

IRS and helpfully—call it the Seventh Sign of the Apocalypse.

The IRS has “helpfully” detailed a self-certification procedure designed to help recipients of retirement distributions who inadvertently miss the 60-day time limit for rolling these amounts into another plan or IRA.

In Revenue Procedure 2016-47, posted the agency’s website, the IRS explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes.

In addition, the revenue procedure includes a sample self-certification letter that a taxpayer—or 401(k) advisor—can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

Normally, an eligible distribution from an IRA or workplace retirement plan can only qualify for tax-free rollover treatment if it is contributed to another IRA or workplace plan by the 60^th day after it was received. In most cases, taxpayers who fail to meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS.

A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.

Ordinarily, the IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Moreover, even if a taxpayer does not self-certify, the IRS now has the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.

The IRS encourages eligible taxpayers wishing to transfer retirement plan or IRA distributions to another retirement plan or IRA to consider requesting that the administrator or trustee make a direct trustee-to-trustee transfer, rather than doing a rollover. Doing so can avoid some of the delays and restrictions that often arise during the rollover process.

For more information about rollovers and transfers, check out the Can You Move Retirement Plan Assets? section in Publication 590-A below.

Can You Move Retirement Plan Assets?

You can transfer, tax free, assets (money or property) from other retirement programs (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers.

Transfers from one trustee to another.
Rollovers.
Transfers incident to a divorce.

This chapter discusses all three kinds of transfers.

Transfers to Roth IRAs. Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. For more information about these transfers, see Converting From Any Traditional IRA Into a Roth IRA , later in this chapter, and Can You Move Amounts Into a Roth IRA? in chapter 2.

Transfers to Roth IRAs from other retirement plans. Under certain conditions, you can move assets from a qualified retirement plan to a Roth IRA. For more information, see Can You Move Amounts Into a Roth IRA? in chapter 2.

Trustee-to-Trustee Transfer

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee’s request, is not a rollover. This includes the situation where the current trustee issues a check to the new trustee but gives it to you to deposit. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers. This waiting period is discussed later under Rollover From One IRA Into Another .

For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option , later.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.”

Note.

An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan.

Kinds of rollovers to a traditional IRA. You can roll over amounts from the following plans into a traditional IRA:

A traditional IRA,
An employer’s qualified retirement plan for its employees,
A deferred compensation plan of a state or local government (section 457 plan), or
A tax-sheltered annuity plan (section 403 plan).

Treatment of rollovers. You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and Reporting rollovers from employer plans .

Rollover notice. written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution. See Written explanation to recipients , later, for more details.

Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Eligible retirement plans. The following are considered eligible retirement plans.

Individual retirement arrangements (IRAs).
Qualified trusts.
Qualified employee annuity plans under section 403(a).
Deferred compensation plans of state and local governments (section 457 plans).
Tax-sheltered annuities (section 403(b) annuities).

Time Limit for Making a Rollover Contribution

You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer’s plan.

Example.

You received an eligible rollover distribution from your traditional IRA on June 30, 2015, that you intend to roll over to your 403(b) plan. To postpone including the distribution in your income, you must complete the rollover by August 29, 2015, the 60th day following June 30.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. For exceptions to the 60-day period, see Automatic waiver , Other waivers, and Extension of rollover period , later.

Rollovers completed after the 60-day period. In the absence of a waiver, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer’s plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions as discussed under Early Distributions in Pub. 590-B. Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contribution, not a rollover contribution.

Example.

You received a distribution in late December 2015 from a traditional IRA that you do not roll over into another traditional IRA within the 60-day limit. You do not qualify for a waiver. This distribution is taxable in 2015 even though the 60-day limit was not up until 2016.

Automatic waiver. The 60-day rollover requirement is waived automatically only if all of the following apply.

The financial institution receives the funds on your behalf before the end of the 60-day rollover period.
You followed all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan).
The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution.
The funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period.
It would have been a valid rollover if the financial institution had deposited the funds as instructed.

Other waivers. If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. To apply for a waiver, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. This revenue procedure is generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application. The information is in Revenue Procedure 2016-8 in Internal Revenue Bulletin 2016-1 available at www.irs.gov/irb/2016-01_IRB/ar14.html. In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:

Whether errors were made by the financial institution (other than those described under Automatic waiver , earlier);
Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error;
Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check); and
How much time has passed since the date of distribution.

Amount. The rules regarding the amount that can be rolled over within the 60-day time period also apply to the amount that can be deposited due to a waiver. For example, if you received $6,000 from your IRA, the most that you can deposit into an eligible retirement plan due to a waiver is $6,000.

Extension of rollover period. If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, two special rules extend the rollover period.

The period during which the amount is a frozen deposit is not counted in the 60-day period.
The 60-day period cannot end earlier than 10 days after the deposit is no longer frozen.

Frozen deposit.

This is any deposit that cannot be withdrawn from a financial institution because of either of the following reasons.

The financial institution is bankrupt or insolvent.
The state where the institution is located restricts withdrawals because one or more financial institutions in the state are (or are about to be) bankrupt or insolvent.

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. Starting in 2015, new rules apply to the number of rollovers you can have with your traditional IRAs. See Application of one-rollover-per-year limitation , below.

Example.

You have two traditional IRAs, IRA-1 and IRA-2. In 2015, you made a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

For 2015, the rollover from IRA-1 into IRA-3 prevents you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because in 2015 you are only allowed to make one rollover within a 1-year period. So when you make a rollover from IRA-1 to IRA-3, you cannot make a rollover from IRA-2 to any other traditional IRA.

Application of one-rollover-per-year limitation. Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. However, trustee-to-trustee transfers between IRAs are not limited and rollovers from traditional IRAs to Roth IRAs (conversions) are not limited.

Example.

John has three traditional IRAs: IRA-1, IRA-2, and IRA-3. John did not take any distributions from his IRAs in 2015. On January 1, 2016, John took a distribution from IRA-1 and rolled it over into IRA-2 on the same day. For 2016, John cannot roll over any other 2016 IRA distribution, including a rollover distribution involving IRA-3. This would not apply to a conversion.

2015 transition rule ignores some 2014 distributions. An IRA distribution rolled over to another (or the same) IRA in 2014 will not prevent a 2015 distribution (within the 1-year period) from being rolled over provided the 2015 distribution is from an IRA that is different from any IRA involved in the 2014 rollover.

The same property must be rolled over. If property is distributed to you from an IRA and you complete the rollover by contributing property to an IRA, your rollover is tax free only if the property you contribute is the same property that was distributed to you.

Partial rollovers. If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). The amount you keep may be subject to the 10% additional tax on early distributions discussed later under What Acts Result in Penalties or Additional Taxes? .

Required distributions. Amounts that must be distributed during a particular year under the required distribution rules (discussed in Pub. 590-B) are not eligible for rollover treatment.Inherited IRAs. If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own as discussed earlier under What if You Inherit an IRA? .

Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b; Form 1040A, lines 11a and 11b; or Form 1040NR, lines 16a and 16b. Enter the total amount of the distribution on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, was rolled over, enter zero on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Put “Rollover” next to line 15b, Form 1040; line 11b, Form 1040A; or line 16b, Form 1040NR. See your tax return instructions. If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2016, attach a statement explaining what you did. For information on how to figure the taxable portion, see Are Distributions Taxable in Pub. 590-B.

Rollover From Employer’s Plan Into an IRA

You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse’s):

Employer’s qualified pension, profit-sharing, or stock bonus plan;
Annuity plan;
Tax-sheltered annuity plan (section 403(b) plan); or
Governmental deferred compensation plan (section 457 plan).

A qualified plan is one that meets the requirements of the Internal Revenue Code.

Eligible rollover distribution. Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following.

A required minimum distribution (explained later under When Must You Withdraw Assets? (Required Minimum Distributions) in Pub. 590-B).
A hardship distribution.
Any of a series of substantially equal periodic distributions paid at least once a year over:
1. Your lifetime or life expectancy,
2. The lifetimes or life expectancies of you and your beneficiary, or
3. A period of 10 years or more.
Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains.
A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant’s accrued benefits are reduced (offset) to repay the loan.
Dividends on employer securities.
The cost of life insurance coverage.

Your rollover into a traditional IRA may include both amounts that would be taxable and amounts that would not be taxable if they were distributed to you, but not rolled over. To the extent the distribution is rolled over into a traditional IRA, it is not includible in your income.

John Sullivan

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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.