Andrew Caballero-Reynolds—AFP/Getty Images
August 24, 2016

The Internal Revenue Service has relaxed a rule that long tripped up some unwitting retirement savers and jeopardized their nest eggs.

Previously, savers moving money from a 401(k)to an IRA, or from one IRA to another, were allowed only 60 days to have those funds in their possession before depositing them into the next retirement account. Those who missed that window generally owed taxes on the full amount and, if they were under age 59½, an additional penalty on top of that. To avoid that huge risk, many financial advisers suggested doing a direct transfer instead of taking the money yourself.

New guidance from the IRS says taxpayers can avoid the dire tax treatment in certain circumstances, including if they lost the distribution check or deposited it into an account they mistakenly thought was a qualified retirement account.

“This is a big deal and it will help a lot of people,” says Ed Slott, a certified public accountant and founder of Before, affected savers not only faced taxes and penalties but saw the affected sums lose their tax-advantaged status.

People who ran afoul of the rule generally did so inadvertently, not because they were trying to pull something over on the IRS, Slott says. There was a costly appeals process that few offenders pursued, he notes.

The new guidance goes into effect immediately. It allows savers to make a written self-certification on why they missed the window. Among other acceptable circumstances listed:

  • The taxpayer’s principal residence was severely damaged.
  • A member of the taxpayer’s family died.
  • The taxpayer or a family member was seriously ill.
  • A postal error occurred.

However welcome, this relief doesn’t change the best practice when it comes to rolling over 401(k) and IRA funds, Slott says: It’s still best to do the transfer directly, from financial institution to financial institution, without taking possession of the money.

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