IRS Announces New Waiver Procedure for Taxpayers Who Inadvertently Miss the 60-day Rollover Deadline
Background–direct and indirect (60-day) rollovers
If you’re eligible to receive a taxable distribution from an employer-sponsored retirement plan (like a 401(k)) you can avoid current taxation by directly rolling the distribution over to another employer plan or IRA (with a direct rollover you never actually receive the funds). You can also avoid current taxation by actually receiving the distribution from the plan, and then rolling it over to another employer plan or IRA within 60 days following receipt (a “60-day” or “indirect” rollover). But if you choose to receive the funds instead of making a direct rollover the plan must withhold 20 percent of the taxable portion of your distribution, even if you intend to make a 60-day rollover. (You’ll need to make up those withheld funds from your other assets if you want to roll over the entire amount of your plan distribution.)
Similarly, if you’re eligible to receive a taxable distribution from an IRA, you can avoid current taxation by either transferring the funds directly to another IRA or to an employer plan that accepts rollovers (sometimes called a “trustee-to-trustee transfer”), or by taking the distribution and making a 60-day indirect rollover (20% withholding doesn’t apply to IRA distributions).
Under recently revised IRS rules you can make only one tax-free, 60-day, rollover from any IRA you own (traditional or Roth) to any other IRA you own in any 12-month period. However, this limit does not apply to direct rollovers or trustee-to-trustee transfers (or to Roth IRA conversions). Because of the 20% withholding rule, the one-rollover-per-year rule, and the possibility of missing the 60-day deadline, in almost all cases you’re better off making a direct rollover or trustee-to-trustee transfer to move your retirement plan funds from one account to another.
Exceptions to the 60-day rollover deadline
But what happens if you do receive an actual distribution from your employer plan or IRA and you want to roll over the funds, but you’ve missed the 60 day deadline? There are limited statutory exceptions to the 60-day rule. For example, the time for making a rollover may be extended for those serving in a combat zone or in the event of a presidentially declared disaster or a terrorist or military action.
But the IRS also has the authority to waive the 60-day limit “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the [individual’s] reasonable control.” To seek a waiver you previously had to request a private letter ruling from the IRS. However, the IRS has just announced (in Revenue Procedure 2016-47) a simpler alternative to seeking a private letter ruling.
The new waiver alternative: “self-certification”
Under the new procedure, if you want to make a rollover but the 60-day limit has expired, you can simply send a letter (the Revenue Procedure contains a sample) to the plan administrator or IRA trustee/custodian certifying that you missed the 60-day deadline due to one of the following 11 reasons:
- The financial institution receiving the contribution, or making the distribution to which the contribution relates, made an error.
- You misplaced and never cashed a distribution made in the form of a check.
- Your distribution was deposited into and remained in an account that you mistakenly thought was an eligible retirement plan.
- Your principal residence was severely damaged.
- A member of your family died.
- You or a member of your family was seriously ill.
- You were incarcerated.
- Restrictions were imposed by a foreign country.
- A postal error occurred.
- Your distribution was made on account of an IRS tax levy and the proceeds of the levy have been returned to you.
- The party making the distribution delayed providing information that the receiving plan or IRA needed to complete the rollover, despite your reasonable efforts to obtain the information.
To qualify for this new procedure, you must make your rollover contribution to the employer plan or IRA as soon as practicable after the applicable reason(s) above no longer prevent you from doing so. In general, a rollover contribution made within 30 days is deemed to satisfy this requirement.
Effect of self-certification
It’s important to understand that this new self-certification process is not an automatic waiver by the IRS of the 60-day rollover requirement. The self-certification simply allows you and the financial institution to treat and report the contribution as a valid rollover. However, if you’re subsequently audited, the IRS can still review whether your contribution met the requirements for a waiver.
For example, the IRS may determine that the requirements for a waiver were not met because (1) you made a material misstatement in the self-certification, (2) the reason(s) you claimed for missing the 60-day deadline did not prevent you from completing the rollover within 60 days following receipt, or (3) you failed to make the contribution as soon as practicable after the reason(s) no longer prevented you from making the contribution. In that case, you may still be subject to additional income taxes and penalties. Because of this potential risk, some taxpayers may still prefer the certainty of a private letter ruling from the IRS waiving the 60-day deadline, despite the additional time and expense involved.
Remember, you can make only one tax-free, 60-day, rollover from any IRA you own (traditional or Roth) to any other IRA you own in any 12-month period. This limit does not apply to direct rollovers or trustee-to-trustee transfers (or to Roth IRA conversions).
Also keep in mind that you can generally leave your funds in a 401(k) or similar plan (at least until the plan’s normal retirement age) if your vested account balance at the time you terminate employment exceeds $5,000.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Federal Income Tax Returns Due
The federal income tax filing deadline for most individuals is Monday, April 18, 2016. That’s because Emancipation Day, a legal holiday in Washington, D.C., falls on Friday, April 15, this year. If you live in Massachusetts or Maine, you have until Tuesday, April 19, to file your return because Patriots’ Day, a legal holiday in both states, is celebrated on April 18.
Not ready to file?
You can file for an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (until October 17, 2016) to file your federal income tax return. You can also file for an automatic six-month extension electronically (details on how to do so can be found in the Form 4868 instructions).
Outside of the country?
Special rules apply if you are living outside of the county, or serving in the military outside the country, on the regular due date of your federal income tax return.
Pay what you owe by the due date of the return.
Filing for an automatic extension to file your return does not provide any additional time to pay your tax. Make the best estimate you can of the amount you owe. You should pay the estimated amount by the April 18 (April 19 if you live in Massachusetts or Maine) due date. If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension.
Do not make the mistakes of thinking you do not have to pay any tax until you file your tax return. If you absolutely cannot pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the unpaid balance (options available may include the ability to enter into an installment agreement).
Year-End Security and CASH Tax-Related Deadlines
Some year-end tax related transactions involve securities and cash. Such transactions must be completed by December 31, 2015 to be reported on your 2015 tax return. Check with your financial institution to find out their cut-off dates for 2015.
- Deadline for Required Minimum Distributions (RMDs): Clients who are 70½ or older must take an RMD from their IRA and/or their QRP for the 2015 tax year. All RMDs must be withdrawn by December 31, 2015, with the exception of RMDs for clients who turned or will turn 70½ during this calendar year. These clients may defer their first distribution until April 1, 2016. Deferring the distribution is not always the best choice from a tax perspective. Check with your tax professional to see if you should take such distributions in 2015 or 2016.If you have already taken the required distribution for 2015, no other action is required. December 22 is a frequent cut-off date. Check with your institution if you need additional time.
You may find it advantageous to take your RMD early in the year or establishing a systematic payment to ensure the annual RMD is satisfied every year. Check with your financial institution for instructions on implementing these alternatives.
- Deadline for Roth IRA Conversions: A Roth conversion form may also need to be submitted before December 31, 2015 to be processed by December 31, 2015. Check with your financial institution to determine the cut-offs and procedures that are required.
- Deadline for Establishing a 2015 QRP: Check with your financial institution to determine the cut-offs and procedures that are required.
- Deadline for Removal of Non-marketable Securities: To have non-marketable securities removed from your accounts by the end of the calendar year there may be a cut-off date. Check with your financial institution to determine the cut-offs and procedures that are required.
- Charitable and Gift Deadlines:
Check with your financial institution to determine the cut-offs and procedures that are required.
Mutual Funds:
Due to the nature of processing charitable mutual fund deliveries, you should provide the following information with each request:
Mutual fund symbol or CUSIP
Number of shares your client would like to donate
Mutual fund account number at the receiving firm
Client account number at the receiving firm
Cash delivered via check and/or federal funds wire:
Between accounts at your financial institution:
Stock delivered via the Depository Trust Company (DTC) system:
Additional information for charitable gifts:
Contact the charity to learn what procedures and accounts they have.
Inform the charity what the specific gift will be (cash or securities). Let them know the amount or securities that they will be receiving. Identify the security (securities) and the number of shares being transferred.
A helpful list for investors
It seems that everyone has a list on almost every topic, especially at year-end and the start of a new year. I sometimes wonder what to do with this information. Anna Prior’s Jan. 2, 2015 New York Times article, “The 15 Numbers Every Investor Needs to Know” is an exception. It provides an approach to planning. Following is a condensed discussion of the article:
- Know what allocation of stocks, bonds and cash is appropriate for you. Among the many factors to consider are: your financial goals, the value of your current investments, your health, your age, and your ability to withstand a drop in the value of your investments.
- Take advantage of your ability to contribute to your employers’ 401(k) retirement plan, if applicable, for your situation. The 2015 maximum contribution is $18,000 for a pretax traditional 401(k) plan and after-tax Roth 401(k) plan. Those 50 or older can contribute an additional $6,000. Understand the requirements and impact of taking distributions from your retirement plans.
- Be familiar with the general valuations of stocks. This will help you gage your investment risk. Compare the average price/earnings (PE) ratio of stocks to the current PE. The S&P 500 is commonly used as a proxy for the stock market.
- Some consider bonds as a source of safety for investors. It is difficult to predict how bonds will perform in the short-term. The yield on the 10-year Treasury note will give you an indication of what the yield on bonds will be in the next 10 years or so.
- High investment costs will reduce your returns The expense ratios of your funds can be found in the fund prospectus, the website of the fund company and other media sources.
- Be aware of your adjusted gross income (AGI). This is the amount at the bottom of page one of you individual U.S income tax return. The AGI will determine if other taxes or limitations will apply to you. Examples are the 3.8% surtax on investment income, Medicare Part B & D premiums, deduction of some retirement plans, and some itemized deductions.
- Estate-tax exemption of the states are often lower than the U.S. estate exemption. This must be considered in your planing for your family, heirs and charitable entities.
- The amount of your essential and discretionary costs should be reviewed periodically. This is important for: retirement planning, insurance planning and maintaining an adequate reserve fund for the unexpected and untimely expenditures.
- Understand your health-care expenses. This is need for; insurance planning, retirement planning and maintaining an adequate reserve fund.
- Be aware of the difference between replacement cost and fair market value. The difference to rebuilding a home can vary from what the home would sell for. Replacing the contents of you home may be more than the fair market of the items.
- The difference between owning and renting a home can have a major impact on your cash flow and quality of life. The impact maybe more significant when buying a first home and when retiring.
- How long you are likely to live has a significant impact on your investment planning and cash flow planning.
- Your approach to borrowing and repaying loans impacts your cash flow planning, investment planning and retirement planning.
- Be aware of current and anticipated mortgage rates. These impact planning relating to refinancing and debt repayment (cash flow planning).
There are many moving factors in planning. An understanding of the parts and the alternatives are essential to a successful plan.
IRA rollover rules change in 2015
IRS previously held that the timing rules applied separately to all IRAs owned by an individual. They applied the rule to each IRA owned. The Internal Revenue Code allow a tax-free distribution if the distribution is rolled into an IRA within 60-days. The tax-free rollover is not allowed if you’ve already completed a tax-free rollover within the previous one-year (12-month) period. The Tax Court held a taxpayer may make only one nontaxable 60-day rollover within each 12-month period regardless of how many IRAs an individual owns (Bobrow v. Commissioner). The IRS will not apply the revised rule prior to 2015.
IRS issued guidance on how the revised one-rollover-per-year limit is to be applied (Announcement 2014-32).
The clarification includes the following:
1) All IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, are aggregated and treated as one IRA when applying the new rule.
2) The exclusion for 2014 distributions is not absolute. Generally you can ignore rollovers of 2014 distributions when determining whether a 2015 rollover violates the new one-year-rollover-per year limit. This special transition rule will not apply if the 2015 rollover is from the same IRA that either made or received, the 2014 rollover.
The one-rollover-per-year limit does not apply to direct transfers between IRA trustees and custodians, rollovers from qualified plans to IRAs, or conversions of traditional IRAs to Roth IRAs.
In general, it’s best to avoid 60-day rollovers whenever possible. Use direct transfers (as opposed to 60-day rollovers) between IRAs, as these direct transfers aren’t subject to the one-rollover-per-year limit. The tax consequences of making a mistake can be significant. A failed rollover will be treated as a taxable distribution (with potential early-distribution penalties if you’re not yet 591/2) and a potential excess contribution to the receiving IRA.
2014 Year-End Charitable Giving
Two of the factors to consider in year-end tax planning are your own financial situation and the tax rules that apply. Congress is considering making changes before year-end that may impact your situation. Some changes may include reinstating all or some tax breaks the expired in 2013. If you wait to determine what changes may be passed for 2014 you may not have enough time to implement your year-end tax planning moves.
Start by identifying the charities you would like to make contributions to and the amount to each charity. Remember to consider the amounts you already contributed during the year.
Check to see if you will be able to deduct the contributions if receiving a tax benefit is part of you motivation for making charitable deductions. In order to deduct your contributions you must file a tax return (Form 1040) and itemize your deductions. That is, you will not receive a deduction if your itemized deductions are less than the standard deduction. The 2014 standard deductions is: $12,400 if you are married and file a joint tax return, $9,100 if you qualify to file as head of household, $6,200 if you are single, and $6,200 if you are married filing a separate return. Both spouses filing a separate tax rerun must itemize their deduction if one spouse itemized their deductions. It maybe beneficial to postpone deductions to the next year if you receive a greater tax benefit in the next year.
The total deduction for contributions is limited to a percentage of your adjusted gross income (AGI). For example gifts to public charities are generally limited to 50% of your 2014 AGI. Other limitations, 30% or 20%, apply depending on the nature of the contribution and the type charity. Amounts not deductible may generally be carried forward over the next 5 years in years that you itemize your deductions , subject to the income percentage limitations.
Contributions can only be deductible if made to a qualified organization. IRS has a listing on their website, Exempt Organizations Select Check: https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check
To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. Generally you can deduct the fair market value of property rather than cash or a check.
The above is not intended as a complete discussion of this subject. A tax professional, can help you evaluate your situation, keep you appraised of any legislative changes, and determine the best approach for your individual situation.
Now is the time to make 2014 charitable gifts of appreciarted assets.
Using appreciated assets for charitable gifts can be very beneficial. The ta x deduction, if applicable, is based on the fair market value on the date of the contribution. The appreciation is not subject to income tax. There are exceptions and special rules that may reduce or eliminate the benefit of the tax deduction.
The deduction limitations depend on the type of property given and the type of organization receiving the property.
Avoid using property that has depreciated in value. The loss on such property cannot be deducted if the property if donated. Sell the asset if you want to use it to fund a charitable contribution. You can deduct the loss, subject to limitations and restrictions, if you sell the property and donate the proceeds.
Capital tax rates are determined by the type of asset and the holding period. The appreciation will be taxed if the gain is does not qualify for capital gains (ordinary gain). Make sure you have held the property long enough for capital gain treatments.
Do not assume the information is the same as the last time you used appreciated assets to make a charitable contribution.
Contact the charitable organization before making the contribution. Verify that the organization is still a “qualified organization”. Determine what their current procedures are before you make the contributions. Make sure they will accept the property you want to donate. Some organizations will not accept property other than cash, checks, credit card, etc. Those that accept other forms of payment may only accept marketable securities.
Next check with your custodian to find out what their current procedures are. The forms required and the time to process the transaction may have changed. All custodians (for corporations, brokerage, mutual funds, etc.) procedures are not the same.
Obtain a “qualified appraisal” if the property is not a marketable security. The procedures are different depending on the type of property and the value of the contribution.
The above is not intended to be a complete discussion of this topic. Be sure to consult with you tax advisor to determine how the transaction applies to you.
You may not be able to complete the gift before year-end if you wait too long. Be sure to give your tax advisor adequate time to evaluate the planned transaction and see if the benefits are what you intend.
Do you know if you will owe tax as a shareholder of a company that completes an inversion?
“Inversions” are the subject of Laura Saunders August 1, 2014 article in the Wall Street Journal, “An ‘Inversion’ Deal Could Raise Your Taxes”.
An “inversion” is when a U.S. company merges into a foreign company. Some U.S. companies (e.g. AbbVie, Applied Materials, Auxilium Pharmesuticals, Chiquita Brands International, Medtronic, Mylan, Pfizer, Salix Pharmaceuticals and Walgreen) have considered or are pursuing an “inversion” to reduce U.S. income tax.
It is expected that the “inversion” will be taxable to U.S. shareholders. Technically the U.S. company is being acquired in a taxable transaction. It is unlikely that the shareholders will receive any cash.
The tax consequences will vary based on each shareholder’s specific situation.
The net investment income tax (3.8%) will apply if your adjusted gross income (AGI) exceeds $200,000 if single and $250,000 if married filing jointly.
The long term capital gains rate is 20% if your AGI exceeds $400,000 if single and $450,000 if married filing jointly; 15% if your AGI exceeds $8,950 through $400,000 if single and $17,900 if married filing jointly.
The impact of the alternative minimum tax, itemized deduction phase-out and personal exemption are some of the other factors to consider.
Taxes will not be due if the stock is held in a traditional individual retirement account (IRA), Roth IRA, 401(k), or other tax-deferred vehicles.
Taxes are only on factor to consider, not the controlling factor, in deciding if the stock of a company considering an “inversion” should be bought, sold or held.
“Inversions” will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes. At that point, there is no capital-gains bill, so some shareholders in firms doing “inversions” will owe taxes they would never have had to pay.”
The tax could be reduced if you have any unused losses from prior years.
Selling other stock or investments that have losses is a strategy to reduce tax from the “inversion”.
Gifting the stock to someone in a lower tax bracket (e.g. young child, grandchild, retired parent or grandparent) is another stragey to reduce the tax. The timing of the gift is important.
Contributing the stock to a charity is another approach if you have held the stock for more than a year and will have a gain. The gain will not be taxed and the value of the stock may be deductible as a charitable contribution, subject to limitations. Be sure to get a timely qualified acknowledgment. Allow enough time to complete the transaction before the “inversion”.
Among the other issues to be considered are: gift/estate taxes, “kiddie tax”, and possible retroactive legislation restricting “inversions”.
This is not intended as a complete discussion of all the factors and consequences to consider. You should consult with your personal advisers to determine what if any action is appropriate for you.
New Law Offers Special Tax Option for Philippines Relief Donations
Under special legislation enacted last week, taxpayers can choose to treat cash contributions made on or after March 26, 2014, and before midnight on Monday, April 14, 2014, as if made on Dec. 31, 2013. This special provision only applies to charitable cash contributions for the relief of victims of Typhoon Haiyan.
Eligible contributions can be claimed on either a 2013 or 2014 return, but not both. Contributions made after April 14, 2014, but before the end of this year can only be claimed on a 2014 return.
Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before midnight on April 14, 2014, are eligible contributions even if the credit card bill isn’t paid until after that date. Also, donations made by check are eligible if they are mailed by April 14.
The Philippines Charitable Giving Assistance Act, enacted March 25, 2014, does not apply to contributions of property. Gifts made directly to individual victims are not deductible.
This benefit is only available to an individual that itemize their deductions. The deduction is not available to those that claim the standard deduction.
Contributions must go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Exempt Organizations Select Check. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.
Contributions to foreign organizations generally are not deducted. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.
A record of the name of the charity, the date of the contribution and the amount of the contribution are required for any deductible contribution. Donations by text message, a telephone bill will meet the record keeping requirement. Donations of $250 or more, taxpayers must obtain a written acknowledgment by the charity.
IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule
I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”. I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations. The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.
IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.
Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.
The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case. The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.
The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.
What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.
You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.
*Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
