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Easier Rules On IRA Rollover Waivers

A new IRS ruling may provide tax relief on late rollovers by some IRA owners.

Normally, if you take money out of your IRA, you're responsible for tax on the distribution, plus a potential 10% penalty if you make an early withdrawal – before you reach age 59½.  But you can avoid current tax liability if you roll over funds from the IRA into another IRA within 60 days.

The surest way to do that is to make a "trustee to trustee" transfer, from one financial company to another. If the money never touches your hands, none of it will be withheld for possible taxes.  However, if you have an immediate but temporary need for money, you could use the rollover process to give yourself a short-term loan—you can have funds paid to you and then redeposit the same amount in an IRA within 60 days. Yet while you won't ultimately be taxed on the rollover, 20% of the amount that you withdraw will be withheld for taxes; you'll need to recoup the money when you file your tax return.

It's easy to miss the 60-day deadline.  You simply might forget about it or you could be distracted by other circumstances.  And if you do fail to redeposit your withdrawal amount on time, you'll be taxed on the distribution at your full income tax rate.

Is there anything you can do to avoid that tax if you inadvertently fail to meet the deadline?  The IRS has been notoriously tough about handing out waivers to tardy taxpayers.  Normally, a waiver will be granted only if you suffer a casualty, disaster, or another event beyond your reasonable control.

The IRS has established several factors to be used in waiver determinations, including the time elapsed since the distribution and whether the inability to complete the rollover was because of death, disability, hospitalization, incarceration, restrictions imposed by foreign countries, or postal error.  If you miss the 60-day deadline because of a mistake by a financial institution, you can get an automatic waiver.

Now the IRS is going one step further.  It says, in Revenue Procedure 2016-47, that a taxpayer can "self-certify" a waiver by sending a letter to a plan administrator or an IRA trustee, custodian, or issuer.  The IRS has developed a model letter for this purpose.

To qualify for the waiver:

  • The IRS can't have previously denied a waiver request with respect to all or part of the same rollover.
  • The deadline has to have been missed because of one or more of the reasons described above.
  • The rollover must be completed within 30 days after the problem that resulted in missing the deadline has been resolved.

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