When rolling money from one tax deferred account to another, be safe and do it as a direct rollover/transfer. Image: Ufuk ZIVANA/Shutterstock.com
Rollovers between IRAs have been around for decades. In the early days of the IRA, any money you chose to rollover was not taxed when distributed, the assumption being that you would roll it into another IRA within 60 days of receiving it.
Twenty or so years ago, the rule was changed so that a “60-day rollover” had federal income taxes withheld, but they could be refunded if you deposited the full amount in an IRA within 60 days of the distribution. So, if you withdrew $50,000 from an IRA intending to roll it over, you would receive $40,000 from the IRA custodian. You would add the $10,000 you have laying around the house to the distribution and deposit the $50,000 in a new IRA and would get the $10,000 that was withheld back with your federal income tax refund.
Uncle Sam’s decision to withhold from funds intended for a rollover resulted in the popularity of a direct rollover (also called a transfer or a trustee-to-trustee rollover). If rolling money between IRAs, or between the TSP and an IRA, the easiest and most foolproof way of doing it is a direct rollover.
However, some individuals still do 60-day rollovers and run the risk of missing the rollover deadline and actually owing the tax that was withheld. If they were under 59 ½ they would also owe a 10% early withdrawal penalty.
When you are planning on rolling money from one tax deferred account to another, make sure that you’re doing it as a direct rollover/transfer. It’ll be a lot easier and less complicated.
The IRS has set up procedures to have penalties and taxes waived in the event of a late (i.e., over 60 days) rollover and even provides a waiver request letter to use in Revenue Procedure 2016-47. Allowable reasons for a waiver (as written in the sample letter) are:
• An error was committed by the financial institution making the distribution or receiving the contribution.
• The distribution was in the form of a check and the check was misplaced and never cashed.
• The distribution was deposited into and remained in an account that I mistakenly thought was a retirement plan or IRA.
• My principal residence was severely damaged.
• One of my family members died.
• I or one of my family members was seriously ill.
• I was incarcerated.
• Restrictions were imposed by a foreign country.
• A postal error occurred.
• The distribution was made on account of an IRS levy and the proceeds of the levy have been returned to me.
• The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite my reasonable efforts to obtain the information.
This sounds like a lot of work to avoid taxes and penalties that could have been easily avoided by simply making a direct transfer. Do it the easy way – make direct transfers rather that 60-day rollovers.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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