By Andy Ives, CFP®, AIF®
When a person takes a distribution from his IRA or workplace plan, he has 60 days from the day of receipt to redeposit (i.e., roll over) those dollars into another qualified account. This assumes no other disqualifying rollovers have been done in the past 12 months and these dollars are otherwise eligible to be rolled over. If he fails to redeposit all or a portion of the withdrawal within the 60-day window, whatever amount remains outside of the IRA or workplace plan will potentially be subject to tax and potential penalties.
How common are 60-day-rollover fails? Very. Unfortunately, people take withdrawals from retirement plans all the time, fully intent on rolling the money back. However, the reality is that many miss the deadline. But what if there were extenuating circumstances as to why the dollars were not rolled over within the 60-day period? After all, sometimes life gets in the way of the best intentions. In the past, there was no possible fix other than to petition the IRS via an expensive private letter ruling (PLR). PLRs are time consuming, costly, and there is no guarantee the decision will go your way.
Enter “self-certification.” Facing so many requests for an extension of the 60-day rollover window, in 2016 the IRS unveiled a no-cost alternative to a PLR. But tread lightly, self-certification is not a “get-out-jail-free” card. It is not a full waiver of liability, and it is not a second chance for rollovers previously denied. Also, it appears that the money out on rollover cannot have been used during the 60-day window. For example, was your rollover really just a short-term loan? Did you put a down payment on a new house with your rollover but didn’t sell your old house quickly enough to replace the rollover funds? It’s likely that self-certification won’t work because you used the money.
The IRS outlined 11 valid reasons for missing the 60-day deadline. These range from errors by a financial institution to simply misplacing a check. If you were seriously ill or incarcerated – those are also acceptable. Was there a postal error? Was the check lost and never cashed? Was your principal residence severely damaged? All are life events and rollover miscues potentially remedied with self-certification.
In fact, the IRS went so far as to create a model self-certification form letter for you to give to the IRA custodian or plan administrator. (Don’t send it to the IRS.) Listed on this letter are the 11 allowable reasons for the late contribution. Just don’t mail the letter. Do the rollover as soon as possible and keep all documentation on file. If the rollover is questioned in the future, present your evidence and the form letter. While the IRS has full authority to disallow the rollover, you will have at least made a legitimate effort to rectify the situation.
Self-certification is a valuable tool that can delay or avoid potentially thousands of dollars in taxes, penalties and fees. While it can save an otherwise failed rollover, be sure to seek competent tax and financial advice before proceeding. Also, confirm that your situation fits one of the 11 permissible reasons…and maybe consider avoiding 60-day rollovers altogether.