If you are planning to move your retirement funds, consider a trustee-to-trustee transfer of your investments and keep your life simple.
Until recently, many taxpayers that received funds and did not properly roll over their IRA or 401(k) and missed the 60-day period to do so found a very sickening surprise: the entire amount received was taxable in the current year.
Typically, they wouldn’t find out until they received a Form 1099 with a huge taxable distribution to be reported on their tax return. Often caused by some administrative oversight or personal hardship, this result can be devastating.
After complaints from taxpayers, the IRS recently published a very taxpayer-friendly Revenue Procedure 2016-47. In lieu of seeking an expensive private letter ruling or contesting the Form 1099 with a custodian that no longer holds your investment (or cares about your plight), the IRS now enables taxpayers to provide a “self-certification” (as provided by a form in the Appendix of the Revenue Procedure) to be provided to the prior custodian for one of 11 reasons.
The liberal, permissible reasons include: an error by the custodian; the retirement fund check was misplaced and never cashed; the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; the taxpayer’s residence was “severely damaged”; a member of the taxpayer’s family died; the taxpayer or a member of the taxpayer’s family was seriously ill; a postal error occurred. These waivers are to be reported on a to-be-revised Form 5498.
The contribution of funds must be made to the new plan or IRA as soon as practicable after the reason or reasons listed for the waiver no longer prevent the taxpayer from making the contribution.
This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution.
This is a very clear, safe harbor that taxpayers should try to fall within, if possible, because there are some additional caveats to this waiver.
Self-certification does not mean you are granted immunity: the IRS can still audit your return and determine the waiver exception claimed is not applicable.
Self-certification waivers will almost certainly be on the IRS radar if you violate another rollover rule (such as making more than one IRA-to-IRA or Roth IRA-to-Roth IRA 60-day rollover in a year). The next violation will not be cured by a self-certification.
So, again, if possible, try to fall within the 30-day safe harbor.
As I mentioned to open this article, try to do a trustee-to-trustee transfer (or direct rollover) if possible. It is simply too easy to do it this way.
For those who do not follow this warning, however, there now appears to be a favorably issued revenue procedure that can help taxpayers avoid serious tax problems.
Douglas S. Delaney, J.D., LL.M is a local tax and estate planning attorney in Bluffton. www.delaneylawfirmplansahead.com