Tuesday, December 13, 2016

IRA Relief

The IRS is a heavily criticized organization for many reasons. Therefore, it is often ignored when the IRS provides taxpayer relief. In August 2016, the IRS provided such relief in Revenue Procedure 2016-47, with regard to IRA rollovers.

As a general rule, the IRS permits a 60 day window for assets to be transferred from one qualified retirement account to another without triggering tax consequences or withdrawal penalties. These are common transfers that occur upon retirement or switching jobs.

However, if the 60 day transfer window is missed, significant tax consequences and penalties can be triggered. Prior to 2016, the only way to avoid the penalties was to request relief through a Private Letter Ruling (PLR), which carries a hefty fee of $10,000 (not including the legal fees inherent in its preparation). 

In August 2016, the IRS provided relief by removing the requirement of a PLR in the event an individual misses 60 day transfer window. Instead the IRS will grant relief at no cost, through a self-certification process. In order to qualify for this no cost relief, a taxpayer must provide the following in writing: 1) That the rollover occurred as soon as practicable; 2) a certification letter to the receiving institution; and 3) a valid excuse.

The IRS has provided guidance with a list of 11 excuses that include: institutional errors; misplaced rollover checks; mistaken distribution to non-qualified accounts; damage to your personal residence; illness/death in the family; incarceration; postal errors; foreign restrictions and IRS levies.  
Since IRA’s are extremely common retirement planning tools, it is important that taxpayer’s are aware of such relief. It would be unfortunate for an individual to lose the tax benefits of a qualified retirement account due to a missed transfer window.