Investors who miss the deadline for moving retirement savings from one account to another are getting a new message from Uncle Sam: Tough luck.
Recent tax rulings show that the Internal Revenue Service, which had been inclined to give investors the benefit of the doubt when their retirement rollovers were botched, is cracking down on offenders. That change means that some account holders are facing big tax bills and are losing out on the tax-deferred growth.
The federal government generally lets investors roll over money from one tax deferred account to another tax-free, such as when moving an individual retirement account from one financial firm to another. That is provided that the money lands in the new account within 60 days. If an investor misses that deadline, the withdrawn funds are subject to immediate tax. Plus, those under 59 1/2 also owe a 10% penalty.
The best way to avoid undoing an IRA? Investors must keep their hands off the money. Instead of withdrawing and redepositing it personally, have the fund custodian move it directly to another financial institution in what is called a "trustee-to-trustee" transfer.
The trouble is, many investors do not know or are ill-advised. Then there is the fund management error. Sometimes you ask to have the IRA put into your taxable checking account. You need to make certain that the money is still not in your checking account the next month and that it has been sent to the right place.
Almost no exceptions to the 60-day deadline existed until 2002, when a new law went into effect to provide some wiggle room for investors who made mistakes. The moments when someone is most likely to be moving retirement savings around are typically tumultuous; when taking an early-retirement buyout, or dealing with the death of a spouse.
For several years after easing the rule, the IRS went pretty easy on offenders. If retirement-account holders could show that they intended to complete the rollover within the allotted time, but had fallen victim to a bank's error or other hardship, they usually could get more time.
But in the past year or so, the government has gotten stingier with such waivers.
For example, an April ruling involved a widower who withdrew all of the money from his dead wife's tax-deferred annuity and company retirement plan. When he later wised up, the IRS denied his belated attempt to roll the money into an IRA, finding that the widower had not originally intended to do so.