The penalty for failing to complete an IRA or a plan rollover in time can be severe. Unless you obtain a waiver from the IRS, the transfer is treated as a taxable distribution even if the failure is inadvertent. However, a new ruling provides some taxpayers with relief.
Background: If you take a withdrawal from an IRA or a qualified plan, you are generally taxed on the amount withdrawn unless you roll over the distribution to another IRA or qualified plan within 60 days. In addition, a 10% penalty may apply to the taxable portion for withdrawals made prior to age 59½, unless a special exception applies. The 60-day period begins on the date the funds are received or electronically transferred to your bank account.
If you use a direct “trustee-to-trustee transfer,” you do not have to worry about 60 days elapsing, and the transfer is not subject to income tax withholding. This is the simplest approach, but you may have immediate needs for the funds.
The next best thing to do is ensure that you complete the rollover within the allotted 60 days. But that is not always possible, or it just might slip your mind. At other times, a delay might be caused by an extenuating circumstance. In certain situations, you may request a waiver, but in the past the waiver had to be approved by the IRS in a private letter ruling.
In 2003, the IRS established specific rules for obtaining such waivers and indicated the factors to be considered in its determination. It also approved an automatic waiver procedure for occasions when the failure to complete a timely rollover was attributable to an error by a financial institution.
Now the IRS says in the new ruling that you may be able to self-certify a waiver by sending a written letter to a plan administrator or an IRA trustee, custodian or issuer. For this purpose, the IRS has created a “model letter” that taxpayers may utilize. Alternatively, you can adapt a letter with similar language.
To qualify for the self-certification, the following three conditions must be met:
1. The IRS cannot have previously denied a waiver request with respect to a rollover of all or part of the distribution.
2. The failure to complete the rollover must be due to one or more of the factors specified by the IRS, including a death, disability, hospitalization, incarceration, restriction by a foreign country, postal error or error by a financial institution.
3. The rollover must be completed as soon as possible. Once the reason for missing the deadline no longer exists, you have 30 days to meet the obligation.