If you miss the deadline for rolling over an IRA distribution to another IRA or eligible retirement plan, you could be subject to taxes and penalties. If you have a valid excuse, you may be able to obtain a hardship waiver from the IRS, but applying is time-consuming and expensive. Fortunately, the IRS recently created a new self-certification procedure to make it easier to claim eligibility for a waiver. Here’s more information on who qualifies for the new procedure and how it works.
Close-Up on the 60-Day Rule
There’s no current federal income tax hit if you properly roll over an IRA distribution into the same IRA, another IRA or an eligible retirement plan, such as a 401(k) plan. For tax-free rollover treatment to apply, you generally must recontribute the amount distributed from the IRA to an IRA or eligible plan by no later than 60 days after the date that you received the distribution.
If you miss the 60-day deadline, the taxable portion of the distribution — the amount attributable to deductible contributions and account earnings — is generally taxed. You may also owe the 10% early distribution penalty if you’re under age 59½.
However, the IRS can waive the 60-day rule if two conditions are met:
- You suffer a casualty, disaster or other event that’s beyond your reasonable control.
- It would be unfair for the IRS not to waive the 60-day rule.
Such waivers of the 60-day rule are generally referred to as “hardship waivers.” Until recently, you had to use the IRS letter ruling process to apply for a hardship waiver, which was a major hassle and required paying a user fee. The new IRS self-certification procedure (see main article) can make life simpler when you need it most.
New Self-Certification Procedure
Taxpayers who miss the 60-day window for tax-free IRA rollovers can use the new self-certification procedure if at least one of these 11 circumstances apply:
- An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
- You misplaced the distribution check and never cashed it.
- You deposited and kept the distribution in an account that you mistakenly thought was an eligible retirement plan.
- Your principal residence was severely damaged.
- A member of your family died.
- You or a member of your family was seriously ill.
- You were incarcerated.
- Restrictions were imposed on you by a foreign country.
- A postal error occurred.
- The distribution was made because of a levy under Internal Revenue Code Section 6331 and the proceeds of the levy have been returned to you.
- The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite your reasonable efforts to obtain the information.
If you qualify under one (or more) of these circumstances, you can claim eligibility for a waiver of the 60-day rollover rule by submitting a written self-certification document to the retirement plan administrator or IRA custodian or trustee.
Absent actual knowledge to the contrary, the plan administrator or the IRA trustee or custodian can then rely on the self-certification in determining whether you have satisfied the conditions for a waiver of the 60-day rollover requirement. If the conditions are satisfied, the plan administrator or the IRA trustee or custodian can accept your contribution as a tax-free rollover contribution. The new self-certification procedure went into effect on August 24, 2016.
Conditions for Self-Certification
The IRS provides a template for self-certification that you can use, or you may use a letter that’s substantially similar. The self-certification document must state that the following conditions have been satisfied:
- The IRS must not have previously denied a waiver request by you with respect to a rollover of all or part of the distribution to which the contribution in question relates.
- You must have missed the 60-day deadline because of your inability to complete a rollover due to at least one of the 11 reasons listed as valid by the IRS.
- The contribution must be made to the plan or IRA as soon as practicable after the applicable reason no longer prevents you from making the contribution.
This last requirement will be automatically satisfied if you make the contribution within 30 days after the reason no longer prevents it.
The IRS also plans to modify its instructions for IRA contributions to require a plan administrator or an IRA trustee or custodian that accepts a rollover contribution after the 60-day deadline to report that the contribution was accepted (that is, that it was rolled over) after the deadline. So the IRS will be forewarned that you’ve taken advantage of the new self-certification procedure.
Differences between Hardship Waivers and Self-Certifications
Self-certification isn’t technically a formal hardship waiver of the 60-day requirement. But it’s effectively the same, assuming you follow all of the applicable rules, because you can treat the contribution as a valid rollover — unless you hear differently from the IRS.
If the IRS determines in the course of an audit that you didn’t meet the requirements for a formal hardship waiver, you can be assessed an income tax deficiency and applicable penalties. So, you’d better get it right.
The new self-certification procedure is good news for IRA owners who have a valid excuse for missing the 60-day window for tax-free rollovers. If you’re unsure whether you qualify for the new IRS procedure or if you need help drafting a self-certification letter, consult with your tax advisor.
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