With its ability to accept a “rollover” from almost all other types of tax-qualified retirement accounts, the IRA has become the most popular type of retirement account, now accounting for a whopping $7.4 trillion of assets (according to ICI). Yet to prevent abuse, IRA rollovers have very specific rules, including only being permitted to do one IRA rollover in a 12 month period, and that any rollover contribution must be completed within 60 days of when the prior account distributed the money.
And unfortunately, the growth in the number of IRA accounts and related rollovers, combined with strict time-based deadlines, has perhaps inevitably led to more and more situations where individuals fail to complete a rollover in a timely manner, which can cause the entire amount of the rollover to become taxable. In turn, this led Congress to grant the IRS the ability to provide individuals a process for requesting a “hardship waiver”, via a private letter ruling, to fix a rollover mistake. But the sheer volume of demand for relief has caused the IRS to repeatedly raise the cost of a PLR for a rollover fix, from $95 in 2003 to as much as $3,000 in 2006 and now as high as $10,000 in 2016.
Now, in the new Revenue Procedure 2016-47, the IRS has announced a new and greatly expedited process to receive relief and the ability to fix a botched IRA rollover. If the 60-day deadline was missed for any of 11 different reasons specified in the new guidance – from a natural disaster to an illness or death in the family to an error of the financial institution – the individual can now complete a late rollover contribution as soon as practicable, and simply provide the financial institution a “self-certification” that the rollover was permissible based on one of the specified reasons. And the IRS has even provided a Model Letter for Self-Certification that any individual can use.
Ultimately, the new process won’t resolve every possible scenario where an IRA rollover might be late, most notably where the taxpayer just botches the timing by not paying attention, due to aggressively using the rollover as a temporary personal loan, or due to bad advice from a financial advisor. Nonetheless, for what are likely the overwhelming majority of scenarios, the new self-certification process will make it fast and easy for most individuals to fix legitimately innocent rollover mistakes… though the IRS still reserves the right to evaluate the situation after the fact, and make an adjustment if the individual was not forthright in the process!