IRC Section 408(d)(3), allows investors to take a distribution from an IRA and re-deposit the money into another IRA without penalty as long as the transaction is completed in 60 days. This rule exists to allow someone to change IRA providers, i.e. to move an IRA from Vanguard to Schwab. Originally, rollovers needed to be completed this way, with the owner taking custody of the funds and forwarding them to another firm.  However, today’s technology allows for a much simpler process known as a custodian to custodian transfer, executed by directing the current institution to electronically send the funds to the new firm so the IRA owner never needs to take custody of the funds. That is an important distinction, as when most people think of a “rollover” they are really thinking of a custodian transfer. There are separate rules for each transaction.

The most common use of the IRA “rollover” is when someone takes a distribution from a qualified account and doesn’t end up needing the money, so they put it back in the IRA.  A less common strategy is to take a short term loan from an IRA via the rollover process. Consider a situation where someone is selling their current home and buying a new home. They may need to close on their new loan prior to receiving funds from the sale of their current residence. Funds needed to close are $100,000 so they take the money from their IRA. As long as the money is redeposited into the IRA within 60 days there are no tax consequences from the transaction. Assuming they will receive at least $100,000 from selling their home within the next two months, this is a great strategy. Notably, true rollovers are limited to 1 per year in order to prevent someone from engaging in repeated rollovers between multiple IRAs throughout the year. This 1 per year limit does not apply to custodian to custodian transfers. 

In the past the IRS has strictly enforced the 60 day time frame for returning funds to the IRA. This rigidity can potentially create a number of challenges. Failing to meet the deadline, even accidentally or by another’s fault has been met with steep consequences. Checks can be lost in the mail or deposited into the wrong account, CPA’s may give incorrect advice, and even personal circumstances can prevent the successful and timely completion of a rollover.  Traditionally, when this occurred it was necessary to obtain a private letter ruling from the IRS under a hardship waiver. This was a relatively straightforward process and would only cost $95 to complete. However, the prevalence of IRAs grew substantially and within 3 years the $95 fee was raised to $500 – $3,000 depending on the size of the IRA! In 2016 the discounted Private Letter Ruling hardship waiver was eliminated, effectively raising the cost of a PLR to $10,000! 

Most recently, In order to provide much needed flexibility the IRS has established Revenue Procedure 2016-47. This allows for a much easier, cheaper way to fix a botched rollover. Under the new rule individuals can “self-certify” that the rollover is in compliance even if they are outside the 60 day window. In order to meet the requirements of the rule the mistake must fall into one of the 11 published categories:

1) an error was committed by the financial institution receiving the rollover contribution or making the distribution to which the rollover relates;

2) the distribution, having been made in the form of a check, was misplaced and never cashed;

3) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;

4) the taxpayer’s principal residence was severely damaged;

5) a member of the taxpayer’s family died;

6) the taxpayer or a member of the taxpayer’s family was seriously ill;

7) the taxpayer was incarcerated;

8) restrictions were imposed by a foreign country;

9) a postal error occurred;

10) the distribution was made as a levy to collect prior taxes owed, but the proceeds of the levy have been returned to the taxpayer; or

11) 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 the taxpayer’s reasonable efforts to obtain the information.

It is also important to note that if one of these exceptions is present the rollover must still be completed “as soon as practicable.” For example, if you were incarcerated you would need to complete the rollover once you are released. There is also a safe harbor provision that allows for a 30 day grace period outside of the original 60 day window. Any rollovers completed in that timeframe are assumed to have been completed “as soon as practicable.” One additional note is that “bad advice” is absent from the list of valid reasons for missing the deadline. Getting bad advice from a CPA or financial advisor does not exempt the taxpayer from their responsibility to complete the rollover in 60 days. 

The process itself is easy to administer and the IRS has provided a model letter that can be used. Once completed, the letter needs to be provided to the institution receiving the funds, not to the IRS. Although, one would want to keep a copy in their own records. The receiving firm then reports the rollover’s status to the IRS via Form 5498. The IRS still reserves the right to deny the claim if they believe that there was a material misstatement on the form. If denied, the rollover is treated as a distribution and penalties as well as interest will be assessed to the taxpayer, not just for the error on the rollover but also for incorrectly reporting it. This new process is effective immediately and affects IRAs and employer retirement plans.”

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