Here’s What Self-Directed IRA Owners Should Know
The bad news is that you only have 60 days to complete an IRA rollover, and if you miss that deadline, whether you’re rolling over funds from a conventional IRA or a self-directed IRA, you may find the IRS will force you to treat the entire rollover as a distribution, and demand taxes and penalties on the full amount.
The good news is that there is a way out for some of you – if you qualify.
The IRS recently released a procedure whereby individual taxpayers can self-certify that your transaction meets the IRS criteria for a waiver of the 60-day deadline, so you can avoid the penalties and interest. This is terrific news for many of our clients, who own and regularly engage in transactions with self-directed IRAs.
The IRS lists eleven acceptable reasons why an IRA owner may miss the 60-day rollover deadline and still qualify for the tax-free rollover treatment:
The taxpayer must have missed the 60- day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons:
- an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
- the distribution, having been made in the form of a check, was misplaced and never cashed;
(c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
(d) the taxpayer’s principal residence was severely damaged;
(e) a member of the taxpayer’s family died;
(f) the taxpayer or a member of the taxpayer’s family was seriously ill;
(g) the taxpayer was incarcerated;
(h) restrictions were imposed by a foreign country;
(i) a postal error occurred;
(j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
(k) the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
To qualify for the self-certification route, you have to certify in writing to your IRA custodian or third party IRA administrator that your transaction qualifies for the waiver. You can find a model letter that you can use to write your administrator in the Appendix to IRS Revenue Procedure 2016-47.
To use this procedure, you must not have been denied a waiver previously by the IRS.
You aren’t entirely off the hook. If the IRS decides to come back and audit you, they could find that you didn’t qualify for a tax-free rollover after all, and still assess you income tax, penalties and fines. So the self-cert procedure allows you to list the transaction as a valid rollover on your tax return, for now, but that relief can be taken away if the IRS finds out the deal didn’t qualify at a later date.
The IRS is still going to know that there was a late rollover. Your custodian or administrator must report rollover dates to the IRS. So you will be on their radar screen. Consider your chances of being audited to be elevated after going through the self-certification procedure for your IRA or self-directed IRA.
If you violate any other rules besides blowing the 60-day deadline, the self-certification process will not bail you out. So if you are using a self-directed IRA, you still cannot violate rules regarding prohibited transactions or self-dealing and expect your self-certification affidavit to get you off the hook. You also cannot execute more than one 60-day IRA-to-IRA rollover or Roth IRA-to-Roth IRA rollover within a 12-month period.
The best bet is to avoid taking personal possession of rollover funds at all, but to have your administrator or custodian handle your rollovers via a direct trustee to trustee transfer. As long as you don’t take possession of the rollover proceeds and your funds stay within an IRA account, you don’t have to worry about blowing any deadlines at all.
Until you are due for a required minimum distribution, that is.
If you are looking at a rollover transaction soon, or if you want more information about self-directed IRA investing in general, contact American IRA, LLC at 866-7500-IRA(472) before making a move. American IRA, LLC is American’s leading authority on self-directed IRAs and providing administrative services and transactional support and record keeping.
With offices in beautiful Asheville and Charlotte, North Carolina, American IRA serves self-directed IRA owners anywhere in the country.
Call us today, or visit us on the Web at www.americanira.com. We look forward to hearing from you.