Important News: IRA Rollovers Now Limited to One Per Year

Through the end of 2014, individuals with more than one individual retirement account (“IRA”) could take a distribution from an account, so long as the funds were either rolled back into the same account, or moved to another IRA within 60 days, they could be fairly confident that the transaction wouldn’t be taxed. What’s more, they typically could do a distribution-and-rollover from each of their IRAs, with none being taxed.

That’s no longer the case. With a few exceptions, the IRS has limited IRA rollovers to one in each 12-month period, across all SEPs, SIMPLE, traditional and Roth IRA accounts. This new rule went into effect on January 1, 2015.

The Tax Court Weighs In

This shift is the result of a 2014 U.S. Tax Court case, Bobrow v. Commissioner. At issue was the petitioners’ claim that their IRA distributions were nontaxable because they were repaid within 60 days. The IRS disputed the repayment schedule, as well as the assertion that the once-per-year limit on rollovers should apply to each IRA. In its opinion, which generally sided with the IRS, the  court stated, “By its terms, the one-year limitation laid out in Section 408(d)(3)(B) [of the IRS Code] is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer.”

That’s a change in the interpretation of the regulations governing IRA distributions. Prior to the decision in this case, the IRS held the position that the limit on nontaxable rollovers applied on an IRA-by-IRA basis, rather than across an individual’s portfolio of IRAs.

The Possibility of Abuses

The intention of the 60-day time frame for rollovers was to allow IRA account holders enough time to transfer funds from one account or financial institution to another without having to worry about any tax consequences. However, the law limited the number of rollovers that could occur in order to minimize potential abuses since it was possible for an individual with numerous IRAs to create a continuous chain of distributions and rollovers, essentially resulting in getting tax-free loans.

Some Exceptions Remain

There are a few exceptions to this new rule. Trustee-to-trustee transfers, which are transactions where funds move from custodian to custodian and are never in the possession of the IRA owner, are not limited. Traditional IRA-to-Roth IRA conversions remain unlimited. However, rollovers between Roth IRAs are limited. Also, rollovers between qualified plans such as 401(k) plans and IRAs, are exempt from the new rule.

In order to allow sufficient time to adjust to the new rule, the IRS will ignore some 2014 distributions. In 2014, if an IRA account holder takes distributions that are rolled over to another IRA, or the same IRA within 60 days, then distributions in 2015 will not be prevented, as long as the 2015 distributions are from IRAs not involved in the 2014 transactions. This rule applies only to distributions made in 2014.

It is important to note that, as of January 1, 2015, any distributions not falling under the allowed exceptions, and that follow an IRA-to-IRA rollover made within the preceding 12 months, should be included in the account holder’s gross income. Moreover, the amounts could be subject to a 10% early withdrawal penalty. Additionally, funds rolled into another IRA could be treated as an “excess contribution” that would be taxed at 6% annually, for as long as they remain in the IRA.

The Bottom Line

To avoid violating the new rollover limits, it makes sense to do trustee-to-trustee transfers, whenever possible, when transferring funds from one IRA account to another. You should work with your tax professional. He or she can provide vital information and advice on this new rule.

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