The IRS learns to be more flexible about IRA rollovers

Is this the beginning of a more fair and pragmatic IRS?

Until now, if you received a rollover from your retirement plan, you had no more than 60 days to deposit the money into another employer’s retirement plan or into an IRA. If you took longer than that, the IRS held that you had use of the money, and the entire distribution would be taxed as income. 

Worse, if you’re over the age of 59½, the agency would add a 10 percent tax penalty.

But all of that just changed. In a posting to its website on Aug. 24, the IRS announced a new procedure: If it takes you longer than 60 days to deposit a distribution from a retirement account, the agency will waive the requirement to report it as a taxable withdrawal.

The IRS now lists 11 mitigating circumstances in which a waiver of the 60-day limit would automatically apply, and taxes and penalties would be avoided. These situations include:

  •  An error by a financial institution in making the distribution or depositing it to your account.
  • The distribution was paid by check, which was lost or never cashed.
  • The distribution was deposited and maintained in an account that mistakenly wasn’t an IRA.
  • Your principal residence was destroyed.
  • One of your family members died or became seriously ill.
  • You were incarcerated.
  • The delay was due to an error by the postal service or delivery company.
  • The plan making the distribution delayed providing information that the receiving plan or IRA required in order to process the deposit.
  • Restrictions were imposed on the transfer by a foreign country.

Another requirement to qualify for the waiver is that the taxpayer would need to submit a self-certification to the IRS. This can be in the form of a letter. To be helpful, the agency has included a copy of a sample letter you can use.

Still, the IRS continues to encourage taxpayers who wish to transfer retirement account balances to another plan or an IRA to consider requesting the plan administrator or trustee to make a direct trustee-to-trustee transfer rather than a rollover. That will give you a better chance of avoiding some of the delays, restrictions and confusion that can often arise during a rollover.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.