Miss a 60-day rollover? According to the IRA, the acceptable reasons for missing include: An error was committed by the financial institution, the distribution check was misplaced and never cashed, the distribution was mistakenly deposited into an account that the taxpayer 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, or the distribution was made on account of an IRS levy, and the proceeds of the levy have been returned to the taxpayer. If you, or someone you know, fall into any of these situations, as a taxpayer, you can take a distribution from an IRA or other qualified retirement plan and if they roll it over within 60 days they can avoid taxation on the distributed amount.
Financial Institution Error – Where the failure to meet the deadline is due to financial institution error, the IRS provides an automatic waiver.
Private Letter Ruling (PLR) – Where automatic waiver does not apply, and the taxpayer feels there is a legitimate reason for missing the 60-day rollover requirement, the taxpayer can request relief though a PLR where the IRS reviews the reason for missing the 60-day rollover period and either allows or denies relief from the 60-day requirement. However, the IRS will charge the taxpayer requesting the PLR a user fee of $10,000, which negates the purpose of a PLR except in cases of very large rollover amounts.
New Self-Certification Procedure – The IRS recently announced a new certification procedure that allows a taxpayer who misses the 60-day time limit for properly rolling the amount into another retirement plan or IRA to make a written certification to a plan administrator or an IRA trustee that a contribution satisfies one of the acceptable reasons, and therefore is eligible for a waiver of the 60-day rule.
Please remember: This provision does not apply to required minimum distributions for taxpayers who are 70.5 years of age and over.). Also, taxpayers are limited to one IRA-to-IRA rollover per year.
The rollover must be completed as soon as practicable after the reason(s) listed above no longer prevent the taxpayer from making the contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason(s) no longer prevent the taxpayer from making the contribution.
This procedure does not apply where the IRS previously denied a waiver request for the same missed rollover.
The IRS provides a model letter that can be used to make the self-certification. Please call Dagley & Co. if you need a copy of the letter, have questions, or need assistance related to a missed 60-day rollover.
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Are you a high-income taxpayer? Would like to contribute to a Roth IRA but cannot because of income limitations? There is a work-around that will allow you to fund a Roth IRA.
High-income taxpayers are limited in the annual amount they can contribute to a Roth IRA. In 2016, the allowable contribution phases out for joint-filing taxpayers with an AGI between $184,000 and $194,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $117,000 and $132,000. Once the upper end of the range is reached, no contribution is allowed for the year.
However, those AGI limitations can be circumvented by what is frequently referred to as a back-door Roth IRA. Here is how a back-door Roth IRA works:
- First, you contribute to a traditional IRA. For higher-income taxpayers who participate in an employer-sponsored retirement plan, a traditional IRA is allowed but is not deductible. Even if all or some portion is deductible, the contribution can be designated as not deductible.
- Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, you now convert the non-deductible Traditional IRA to a Roth IRA. Since the Traditional IRA was non-deductible, the only tax related to the conversion would be on any appreciation in value of the Traditional IRA before the conversion is completed.
Potential Pitfall – There is a potential pitfall to the back-door Roth IRA that is often overlooked by investment counselors and taxpayers alike that could result in an unexpected taxable event upon conversion. For distribution or conversion purposes, all of your IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.
This may or not may affect your decision to use the back-door Roth IRA method but does need to be considered prior to making the conversion.
There is a possible, although complicated, solution. Taxpayers are allowed to roll over or make a trustee-to-trustee transfer of IRA funds into employer qualified plans if the employer’s plan permits. If the rollover or transfer to the qualified plan is permitted, such rollovers or transfers are limited to the taxable portion of the IRA account, thus leaving behind the non-taxable contributions, which can then be converted to a Roth IRA without any taxability.
Please call Dagley & Co. if you need assistance with your Roth IRA strategies or need assistance in planning traditional-to-Roth IRA conversions.
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The IRS allows an individual to take a distribution from his or her IRA account and avoid the tax and early distribution penalties if the distribution is redeposited to an IRA account owned by the taxpayer within 60 days of receiving the distribution.
Early in 2014, in a tax court case, the court ruled that taxpayers could only have one IRA rollover per 12-month period. This was contrary to the IRS’s long-standing one rollover per every IRA account every 12 months. This far more liberal position was also included in published IRS guidance. However, contrary to general public opinion, guidance provided by the IRS in their publications is not citable, carries no weight in audit or court, and only represents the IRS’ interpretation of tax law.
As a result, the IRS has adopted the Court’s more restrictive position, but will not apply the new interpretation until 2015, giving taxpayers time to become aware of the new restrictions. The IRS is modifying its published 2015 guidance to reflect this new position.
The IRS announced in November that the one-per-12-month-period rollover rule also applies to Simplified Employer Pension Plans (SEPs) and SIMPLE plans. Included in the November announcement, the IRS indicated it would not count a distribution taken in 2014 and rolled over in 2015 (within the 60-day limit) as a 2015 rollover.
Not counted towards the one-per-12-month rule are traditional to Roth IRA conversions or trustee-to-trustee IRA transfers where the funds are directly transferred from one IRA trustee to another.
Please get in touch with Dagley & Co. if you are planning an IRA distribution and subsequent rollover and are not positive it falls within the one-per-12-month limit.
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