If you change jobs or retire, you’ll likely roll over the money from your old employer’s 401(k) into a new employer’s retirement plan or into an IRA.
But rollovers can be complicated. Missing a critical deadline — which many people do — will trigger income taxes and possibly a 10 percent early-withdrawal penalty. Now the IRS has eased up on its rule for those failing to complete a rollover in time.
“This is a big deal that will help a lot of people. It could save people their retirement savings,” says Ed Slott, an IRA expert with Ed Slott and Company (IRAHelp.com) in Rockville Centre, N.Y. “I only wish they had done it earlier.”
There are basically two ways to do a rollover. Many people choose to get a check for the amount in their 401(k) or other tax-deferred retirement account and then deposit the cash in another retirement plan or IRA. With this type of rollover, you have only 60 days from the time you receive the check to then deposit it in a new retirement account. Miss the 60-day deadline, and you’ll get hit with taxes on the amount and maybe a penalty.
If the rollover isn’t done in time, you can seek a deadline waiver from the IRS under a private ruling, but that’s an expensive and lengthy process, Slott says.
Under this new rule, which takes effect immediately, the 60-day requirement will be waived if you miss the deadline for one of several reasons. These include: you’re ill or incarcerated; a family member is ill or died; your home is severely damaged; you misplaced the retirement check and never cashed it; your financial institution made an error; a postal error occurred; restrictions were imposed by a foreign country; the money was mistakenly deposit into a non-retirement account.
To get a waiver, you must send a letter to the institution receiving the rollover. The IRS provides a sample letter to use. The rollover then must be done within 30 days after the problem has been resolved, the IRS says. The IRS, however, can always overrule the waiver if it finds you haven’t been truthful, Slott says.
Of course, there’s another way to avoid this issue completely. Don’t get a check from your retirement account to roll over into a new account yourself. Instead, instruct that your 401(k) or retirement account money be directly transferred into another retirement account. There will be no deadline to worry about and hence no taxes or penalty.