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 60th 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?
- Transfers from one trustee to another.
- Rollovers.
- Transfers incident to a divorce.
This chapter discusses all three kinds of transfers.
Trustee-to-Trustee Transfer
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).
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.
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.
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.
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.
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.
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.
Rollover From Employer’s Plan Into an IRA
- 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:
- Your lifetime or life expectancy,
- The lifetimes or life expectancies of you and your beneficiary, or
- 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.