IRS Grants Relief To Taxpayers Transferring Retirement Funds

Posted by: Brookside Admin

Retirement savings

In late August, an IRS rule change took effect that could save individuals a significant portion of their retirement savings in certain situations. 

The 60 day rule states that funds taken out of a retirement account like a 401(k), or IRA, must be rolled over, or deposited in another retirement account within 60 days. If you miss that deadline, it's considered a normal distribution that is taxed, and you may also face an early withdrawl penalty equal to 10% of the withdrawl. Depending on how much was in your retirement account, that could set you back years. 

But, considering there are a number of extenuating circumstances that might prevent you from rolling over those funds to a new retirment account, the IRS has amended this rule. The 60 day deadline is still in effect, but there are now more acceptable ways to avoid the penalties and taxes. 

In the past, if you failed to rollover a withdrawl from your retirement account within 60 days, your only hope for relief was to apply for a private letter ruling. That starts with paying the IRS a large penalty, which as of the start of 2016 is $10,000. Additional money is then needed to pay for a tax pro to prepare your private letter ruling request. In the end, you could end up paying around $20,000 just to have the IRS consider your request. If granted, you may be able to roll the money into a new account within 9 months. 

That's certainly not an ideal scenario, but it's better than paying the taxes and penalty on large retirement account distributions. 

With August's rule change, however, there's an alternative to the expensive PLR. The new self-certification option allows the taxpayer to prepare their own model IRS letter, which the IRS website even supplies a template for. There's no hefty penalty for the process, and no need to pay a tax pro to prepare the request for you. But, this isn't a get out of jail free card. 

You must check one of 11 acceptable excuses for missing the 60 window, and your excuse must be verified and accepted by the IRS. 

Acceptable excuses include errors by the trustees of your retirement accounts, misplaced checks, rollover to an ineligible retirement plan, significant damage to your residence, a death in the family, or prison time served. 

In addition to checking one of these boxes, you must also complete a rollover of the funds within 30 days of becoming aware of the excused reason. But, this can't be a hard and fast deadline because there's no way to determine exactly when 30 days has passed from some of the acceptable excuses. Still, best practice would be to rollover the funds as soon as possible, and submit your IRS letter. 

To avoid all of this hassle, a trustee to trustee transfer is the preferable option for moving retirement funds from one account to another. There are no penalties with these transfers, and also no limit on how many direct transfers you're allowed each year. 

If you have questions about how your retirement accounts relate to your taxes, or need advice on how to avoid unnecessary taxes and penalties, come see us at Brown Kinion and Company CPAs.