A Rollover Mulligan for Your 401(k) Distribution

In golf, "Mulligan" is widely used to describe any do-over, any second chance after initial failure. So you could say that the Internal Revenue Service (IRS) recently announced that it has established its own Mulligan—a new self-certification procedure for recipients of retirement plan distributions who accidentally miss the 60-day time limit for rolling over these amounts into another retirement plan or individual retirement account (IRA).

Usually, an eligible distribution from an IRA or employer-sponsored retirement plan (401(k), 403(b), etc.) can be rolled over tax-free if it is deposited to another IRA or workplace plan within a 60-day period after the distribution was received. (For related reading, see: Why You Need to Find the Right IRA Beneficiary.)

Although most traditional rollovers transfer as checks mailed from one financial institution to another, many others mail the check directly to you, leaving the deposit responsibility in your hands. This is where most of the issues arise, as the 60-day clock begins ticking for you to find a new qualified account to deposit the money into to avoid taxes and penalties.

If you fail to deposit the rollover money within the time period, the entire amount is taxed at ordinary income rates. If you are under age 59.5, there is an additional 10% early withdrawal penalty (as well as the lost future tax deferral and gains).

The IRS procedure explains how eligible taxpayers can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. Before this new procedure, in most cases, taxpayers who failed to meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS, an onerous and potentially expensive appeal. 

The Limitations

A taxpayer who missed the time limit can now qualify for a waiver in one or more of eleven circumstances:

  • An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
  • The distribution, having been made in the form of a 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 principal 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.
  • The taxpayer was incarcerated.
  • Restrictions were imposed by a foreign country.
  • A postal error occurred.
  • The distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer. 
  • 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.

The IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Moreover, even if a taxpayer does not self-certify, the IRS now has the authority to grant a waiver during a subsequent examination without a private letter ruling. The IRS provides a sample self-certification letter in the revenue procedure. (For related reading, see: 5 Investment Mistakes You Might Be Making.)

The easiest way to avoid an issue is to transfer retirement plan or IRA distributions to another retirement plan or IRA via a direct trustee-to-trustee transfer. The full revenue procedure and the self-certification letter can be viewed via the Revenue Procedure 2016-47. (For related reading, see: How Financial Time Are Changing.)

 

Important Disclosures: Please remember that different types of investments involve varying degrees of risk, including the loss of money invested.  Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by American Economic Planning Group, Inc. (“AEPG”) will be profitable. Definitions of any indices listed herein are available upon request. Please remember to contact AEPG if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from AEPG and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be made based on the investors specific financial needs, objectives, goals, time horizon, and risk tolerance.

This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of AEPG.  Descriptions of AEPG’s process and strategies are based on general practice and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.