IRS Throws Retirement Savers a Bone

For many years, those saving for retirement had 60 days to rollover their IRAs in order to avoid fees. This put many savers in a unique predicament, which forced them to do direct transfers rather than obtaining the funds themselves and then moving it to the new account. Fortunately, the IRS has relaxed a bit on this rule.

How It Used to Work

Imagine you have $200,000 in a 401(k) account, and you want to move some of those funds over to an IRA. You may choose to withdraw the portion of the funds you want to transfer, then deposit them into your IRA. However, according to the old method and tax law, you only had 60 days to get those funds out of your possession and into your IRA account. Many, many savers missed this window, but not because they were trying to hide something from the IRS. They missed it due to unforeseen circumstances, and they were forced to pay dearly. If they were younger than 59 and one-half years, their penalties were even heavier.

The New Rule

The IRS has become a bit more relaxed when it comes to redistributing retirement savings funds, which can help many people save thousands or even tens of thousands of dollars in tax penalties. Some of the circumstances that may qualify savers for a penalty waiver include:

  • A lost distribution check. Things often can and do happen. In the past, savers who lost or misplaced their distribution checks missed the 60-day window simply because they had to wait for a replacement check. This is no longer the case.
  • Accidental deposit into a non-qualifying retirement account. Many more people accidentally deposited their funds into accounts that retirements they believed were qualified, but were not. Not only did these people have to pay major taxes, but they also had to move their funds a second time, resulting in yet another waiting game. To help alleviate this, there is no more tax penalty in this case, and the IRS provides more detailed guidance.
  • The taxpayer’s home was significantly damaged. In the event of a fire, natural disaster, or other event, it is possible for taxpayers to get an extension on the 60-day window to avoid penalties.
  • A death in the family. In this case, the taxpayer can self-certify that a death in the family prevented them from meeting the window.
  • A postal error. Though it is relatively rare, it is very possible for distribution checks to get lost in the mail. In this case, there are no penalties.
  • A serious illness. If the taxpayer or a member of his or her immediate family was seriously ill during the 60-day window, they can get a penalty waiver.

Of course, according to the experts, the best way to avoid these fees is to transfer the money directly without ever taking possession of it. This completely negates any risk, and it simplifies things, too.

Retirement savers across the country are getting a much-needed tax break, and that’s always a good thing. The 60-day window does still apply in many cases, but if you fit any of the aforementioned criteria, you can have your penalties waived and keep your account’s tax-advantaged status.