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Take ‘easy way out’ of rollover mess

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in Small Business Tax

What can you do if you miss the deadline for an IRA rollover? Now it’s easier for certain taxpayers to avoid a tax catastrophe.

Alert: The IRS has issued a new procedure on rollover waivers. (Rev. Proc. 2016-47, 8/24/16) If you qualify, you can self-certify a waiver without going through the hassle of obtaining a private letter ruling.

Self-certification is generally available if the IRS approves a waiver via a formal request.

Here’s the whole story: The tax law allows you to roll over funds distributed from an IRA back into the same IRA, a different IRA, or a qualified plan account such as a 401(k) account without any current tax liability. But the rollover must be completed within 60 days of receiving the distribution. If you miss the 60-day deadline, the IRA distribution is taxable, plus a 10% penalty may be added if you’re under the age of 59½.

Although the IRS has been strict in the past, it may grant you a waiver if you apply for private letter ruling and have a good reason for missing the 60-day deadline. The IRS spelled out the factors that go into its determination when it issued Rev. Proc. 2003-16. It also authorized an automatic waiver procedure when a deadline is missed due to an error by a financial institution.

In its latest ruling, the IRS shows even more mercy. It says you can self-certify a waiver by sending a written letter to a plan administrator or IRA trustee or custodian. The IRS has provided a model letter to use for this purpose.

But the process isn’t automatic. To qualify under Rev. Proc. 2016-47, the following requirements must be met.

  • The IRS can’t have previously denied a waiver request with respect to a rollover for a distribution to which the contribution relates.
  • Failure to meet the 60-day deadline must be due to one or more of the factors specified in Rev. Proc. 2003-16, including death, disability, hospitalization, incarceration, restrictions from a foreign country, postal error and financial institution error.
  • The rollover must be completed as soon as possible. If the reason for missing the deadline no longer exists, you have 30 days to clean up the mess by making the rollover.

This shouldn’t be viewed as a get-out-of-jail-free card, but it can be relied upon in a pinch.

Tip: Rollover obligations can be avoided completely with a trustee-to-trustee transfer from your IRA into another eligible account.

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