By Nathan Vinson
The IRS recently enacted a new IRA rollover rule that’s actually good for consumers, and something that can really help you – but it is a lot more complicated than it appears on the surface. Essentially, the IRS is now giving you a year to roll your old retirement account into a new account or IRA, but only if you’ve faced difficult circumstances that delayed you from making the transaction.
In the past, once you leave a job, you may have received a check for the balance of the funds in your 401(k) (or 403(b) or 457 plan, which are used by non-profits and government agencies, respectively). Once the check is in the mail, you’ve traditionally had 60 days to roll that money into an IRA or other qualifying retirement account.
The administrator of the retirement plan is required to withhold taxes plus a penalty from your check, and will report that to the IRS. You won’t see the withheld money again, unless you roll over the funds within that 60-day time period.
The basic concept is that Uncle Sam wants you saving for retirement, and penalizes you if you don’t keep up with it. Plus, 401(k) money goes into the account pre-tax, so it’s their chance to tax the money – and as we all know, the government never misses a chance to grab some dollars.
Waivers can help the time-pressed
Just this year, the IRS has announced it will offer waivers for specific circumstances in which the rollover isn’t completed within 60 days.
The IRS is allowing some to automatically qualify for a waiver. In those cases, the person must have done everything as the financial institution instructed, but the financial institution didn’t get the rollover set up correctly on time. Another way to self-certify for a waiver is that the funds are deposited into a plan or IRA within one year from the beginning of the 60-day rollover period.
In other words, you now have a year to get that money rolled over – but you need to have a solid reason why it didn’t happen sooner.
To self-certify, read this and use the model letter within it to explain to the financial institution why they should accept your rollover. Acceptable reasons can include the death of a family member, the information going to the wrong address, the financial institution setting up the rollover incorrectly, your home being destroyed, and many other legitimate reasons. The IRS notes that your financial institution isn’t required to accept a late rollover, but the letter may help persuade them to do so.
One point the IRS makes, though, is that filling out the model letter and giving it to your bank is not an official waiver. It may make your financial institution more likely to accept your rollover. But if you get audited, the IRS can decide that you didn’t qualify for the waiver.
If you decide you do want to formally apply for a waiver, the fee is $10,000. Yes, we know, we read that four times ourselves. Here’s how to do it. It may be worth it to you if a large sum of money is at stake, but for the average rollover, it’s probably not.
If this all seems like more than you’d like to tackle on your own, I can provide legal advice to you. You can contact me, attorney Nathan Vinson, at (270) 781-6500 or firstname.lastname@example.org. I’m happy to help you.
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