By Ian Berger, JD
Are you moving assets between IRAs or from a company plan to an IRA (or vice-versa)? You should know that using a direct transfer is a much better idea than doing a 60-day rollover. Direct transfers avoid all of the possible issues which can occur with 60-day rollovers:
- If the deadline is missed, the rollover amount will be considered a taxable distribution and may be subject to a 10% early distribution penalty.
- A late rollover will be treated as an excess contribution in the receiving IRA and subject to a 6% annual penalty unless timely withdrawn.
- Even if you do a valid 60-day rollover, a company plan distribution is subject to 20% withholding for federal income taxes – and maybe state withholding as well.
- 60-day IRA rollovers are subject to the once-per-year rollover rule. That rule restricts certain rollovers of a distribution that occurs within 12 months of a prior distribution that you rolled over. (The rule doesn’t apply to company plan-to-IRA rollovers, IRA-to-company plan rollovers or Roth conversions.)
With a direct transfer, you don’t have to worry about any of these problems. Despite this, some folks still wind up doing 60-day rollovers and, inevitably, wind up missing the deadline. If you don’t have a legitimate excuse for missing the deadline, you’ll face some or all of the serious consequences discussed above.
However, if the late deadline wasn’t your fault, you might be in luck. In 2016, the IRS introduced a free self-certification program for fixing late rollovers. Self-certification only requires you to provide a letter to the receiving custodian indicating your error was due to one or more of 12 specified reasons. (The letter does not need to go to the IRS.) Some of these reasons are:
- An error by the custodian making the distribution or the custodian receiving the rollover;
- The rollover check was misplaced;
- The rollover check was mistakenly deposited into a non-retirement account;
- Postal error; and
- Death or serious illness of a family member.
Self-certification was designed to replace the old way of fixing late rollovers, which required requesting a private letter ruling (PLR) from the IRS. The IRS can waive the 60-day deadline where “equity or good conscience” requires a waiver. However, the filing fee for a PLR request is $10,000, and attorney or CPA fees for submitting the request can run thousands of dollars more. So, you definitely want to use self-certification if you can.
But seeking a PLR can be a necessary option if you miss the rollover deadline for a reason outside the 12 reasons required for self-certification. Recently, in PLR 202134019, the IRS gave a waiver to an IRA owner who had relied on someone else to do a rollover that, lo and behold, never got done.
The important point is that you don’t have to concern yourself with fixing a late rollover if you don’t do a rollover in the first place. A direct transfer is a better way to go.