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Be Wary of New IRA Rollover Limitation

In 2014, the Tax Court issued a ruling that overturned over 30 years of IRS guidance and practice. The ruling concerned how often a person may use the 60-day tax-free rollover rule to roll amounts from one Individual Retirement Account (IRA) to another.

The basic rule states that use of the 60-day provision for an IRA-to-IRA rollover may only be made once in any 12-month period (this is called the one-rollover-per-year rule.) The IRS has always interpreted the 12-month rule to apply on an IRA-to-IRA basis, meaning a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual.

However, the Tax Court held that an individual can’t make a non-taxable rollover from one IRA to another if he or she has already made a rollover from any IRAs in the preceding 12-month period.

As a result of the Tax Court decision, the IRS has had to reverse its guidance and has issued new guidance generally effective January 1, 2015. The IRS has adopted the "any IRA 12-month rule" in line with the Tax Court ruling. An example will show how this works.

Illustration of the rule change

Prior rule: If you had three traditional IRAs, IRA-1, IRA-2 and IRA-3, and in 2011 you took a distribution from IRA-1 and rolled it into IRA-2, you could not roll over a distribution from IRA-1 or IRA-2 within 12 months of the 2011 distribution but you could roll over a distribution from IRA-3.

New Rule: Beginning in 2015, using the same facts, you will no longer be able to roll over a distribution from IRA-3 as all IRAs are aggregated for purposes of the 12-month rule.

To which IRAs does the aggregated one-rollover-per-year-rule apply?
The rule applies to rollovers between all traditional IRAs, including SEP-IRAs and SIMPLE-IRAs. It also applies to rollovers from one Roth IRA to another.

Which rollovers are exempt from the new rule?

  • Trustee-to-trustee IRA transfers
  • Conversion from a traditional IRA to a Roth IRA
  • Rollovers to or from an employer plan or between employer plans
  • In-plan Roth rollovers

Tax consequences of failure to meet rule
If an individual does more than one rollover in a 12-month period, then any rollover after the first rollover will be invalid and will be treated as a taxable distribution, potentially subject to early distribution penalties, followed by an excess contribution. Any excess contributions would need to be corrected by the following April 15 to avoid further penalties.

Transition rule
The rule is generally effective January 1, 2015. However, it will not apply to a situation in which the first rollover was made in 2014 and then a second rollover is made in 2015 involving a separate IRA.

If you have any questions about the new rollover rules, please contact Roger Prince or Bill Enck.

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