IRS Gets Flexible on IRA Rollover Rules

IRS Gets Flexible on IRA Rollover Rules

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By Nick Clay

IRS? Flexible? Yes you read that correctly. If you’ve left a job that provided an employee sponsored retirement plan you may or may not know your options for the money you leave behind.
Typically you have 4 options for your vested money.
1. Cash it out (not recommended)
2. Leave it with your previous employer (also not recommended)
3. Roll the money over to an Individual Retirement Account (IRA)
4. Roll the money into your new employer sponsored plan (if allowed)

If you elect to do a rollover to an IRA or to your new plan, the process would look something like this:
1. You would request a check from your previous retirement plan sponsor.
2. Retirement plan sponsor would close your previous account and send you a check for your vested amount.
3. You would then have 60 days to deposit the check into your new retirement plan or IRA.

Easy enough, right? Well, what happens if life gets in the way and you don’t get the check deposited to your new plan within the 60 day window? Historically, the IRS would deem you had possession of the money and would tax you on the entire amount. Furthermore if you were under the age of 59 ½ the IRS would impose a 10% penalty on the funds.

With Revenue Procedure 2016-47, the IRS has gotten flexible, and it now depends on the circumstances. Section 3 of the revenue procedure lists 11 possible reasons for missing the 60 day window, reasons include you or a family member became seriously ill, a family member died, a postal error occurred, you were incarcerated, the check was misplaced and never cashed (yes, really!), etc.

So what do you do if you miss the 60 day window? In the past if you wanted to “appeal” to the IRS, you would have had to obtain a private letter ruling from the IRS. Now you must simply “self-certify” by written communication to the plan administrator or IRA trustee. In the appendix of the revenue procedure, the IRS has included a sample letter that can (and probably should) be used word for word if you want to self-certify. With this letter, you can report the contribution as a valid rollover unless you are later informed otherwise by the IRS.

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