IRS gives tardy retirement savers more rollover time

Monday, August 29, 2016

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Didn't redeposit that 401(k) distribution check from your old employer into an IRA or your new boss' qualified retirement savings plan within two months' time?

That once meant you'd likely have to fork over hefty taxes and penalty fees on those hard-earned, once-tax-deferred savings but now, thanks to a new Internal Revenue Service policy, your word that it was an honest mistake will be enough for the feds to give you a break.

Under the IRS' new "self-certification" rule, announced on Thursday, eligible taxpayers who can attest to experiencing one or more of 11 "mitigating circumstances" that led to their missing the normal 60-day time limit for tax-free funds transfer can qualify for a waiver. The revenue procedure posted at the website includes a sample letter taxpayers "can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver."

The list of 11 qualifying circumstances includes misplaced, uncashed distribution checks; severe damage to a taxpayer's home; death of a family member; serious personal or family illness; incarceration; or restrictions imposed by a foreign country. The IRS will "ordinarily" honor a taxpayer's "truthful self-certification" that the circumstances indeed apply and grant the waiver, the agency said in a press release. The IRS also has the authority to grant waivers in subsequent examination to taxpayers who do not self-certify prior.

New waiver policy or no new waiver policy, the IRS still advises taxpayers arrange direct trustee-to-trustee transfers of retirement plan or IRA balances. "Doing so can avoid some of the delays and restrictions that often arise during the rollover process," according to the press release.

Financial advisor Tim Maurer, director of personal finance for Buckingham and the BAM Alliance, is of a similar mindset. "Of course, I'm glad to see that the IRS is giving a break to those who might otherwise halve their retirement savings due to the punishing taxes and penalties assessed to early 401(k) withdrawals, whether accidental or purposeful," he said. "But I'd much rather avoid subjecting myself (or my clients) to the mercy of the 'mitigating circumstances,' as defined by the IRS.

"Eliminate the worry and just get it done as soon as possible," said Maurer.