The Price of Procrastination: What Happens When You Miss the 60-Day IRA Rollover Window

When it comes to moving retirement account money from one IRA (or other eligible retirement account) to another, Congress has given you a couple of options. On one hand, you can have the money sent right from one institution to another. This is known as a trustee-to-trustee transfer, or a direct rollover, and is the preferred way to move money, as it avoids a lot of problems.

On the other hand, Congress also allows you to move money indirectly. In other words, instead of having money sent right from one account to another, you can receive the money from your retirement account (i.e. a check made payable to you). If you choose to use this method of moving money, you have 60 days, starting with the date you receive the money, to get the money back into another retirement account… or face the consequences. And those consequences can be quite expensive.

IRA distributions that are not timely rolled over are added to your income and are taxable in the year you take the distribution. So, for instance, if you take $100,000 from your IRA and fail to timely roll it over, you will pay tax on an additional $100,000. If you have an effective tax rate, between state and federal taxes, of 30%, you will owe $30,000 to Uncle Sam. If you’re under age 59 ½, you will also get hit with the 10% early distribution penalty, unless an exception applies. That would bring your total tax bill to $40,000. Obviously, the bigger your distribution, the more that failing to timely roll it over will cost you. Larger distributions could easily trigger income tax of several hundred thousand dollars or more.

So is there any way rectify such a mistake? In fact, there may be. It’s called a private letter ruling (PLR), and depending on why you missed the 60-day deadline, you may be able to get a favorable one, but even then, your mistake will cost you.

PLRs are a bit like mini court cases between you and the IRS, where you can ask IRS for an extension of the 60-day window, but they aren’t free. The typical fee for a PLR is $10,000, but there are actually “bargain” rates for 60-day PLRs that range from $500 to $3,000, depending on how large the distribution you are trying to rollover is. That’s not all though. You’re probably going to have to pay some professional, like a CPA or attorney, to prepare your ruling, and those professional fees could easily come to $10,000 or more.

Just because you pay the IRS fee doesn’t mean all is forgiven though. IRS is not required to, and does not, approve all PLR requests. Successful requests generally involve situations where the 60-day deadline was missed due to some event outside of your control, such as an illness, where the money was not used for any other purpose while outside of your retirement account and where you had a true intent to do a rollover.

If you are successful in your PLR request, IRS will give you more time to complete your rollover and avoid the taxation (and perhaps, the 10% penalty) on your distribution. However, if you’re unsuccessful, your stuck paying the PLR fees and all the taxes and penalties you owed on your distribution.

So here’s the deal… try to move money directly, via trustee-to-trustee transfer or direct rollover. If you absolutely have to use a 60-day rollover, keep one eye on the clock, because if you miss the deadline, you may not be happy with the price of procrastination.

- By Jeffrey Levine and Jared Trexler

Posted in: 10 percent penalty,Ed Slott,ed slott ira,ed slott retirement,financial,financial advisor,income tax,ira rollover,IRAs,IRS,Jeff Levine,private letter ruling,retirement planning,Tax Planning