IRABackground

The Inter­nal Rev­enue Code says that if you receive a dis­tri­b­u­tion from an IRA, you can’t make a tax-free (60-day) rollover into anoth­er IRA if you’ve already com­plet­ed a tax-free rollover with­in the pre­vi­ous one-year (12-month) peri­od. The long-stand­ing posi­tion of the IRS was that this rule applied sep­a­rate­ly to each IRA some­one owns. Ear­li­er this year, how­ev­er, the Tax Court, in the case of Bobrow v. Com­mis­sion­er, held that, regard­less of how many IRAs he or she main­tains, a tax­pay­er may make only one non­tax­able 60-day rollover with­in each 12-month peri­od.

 

The IRS response to Bobrow

The IRS, in Announce­ment 2014–15, indi­cat­ed that it would fol­low the Tax Court’s Bobrow deci­sion and apply the one-rollover-per-year lim­it on an aggre­gate basis, instead of sep­a­rate­ly to each IRA you own. How­ev­er, in order to give IRA trustees and cus­to­di­ans time to make changes in their IRA rollover pro­ce­dures and dis­clo­sure doc­u­ments, the IRS indi­cat­ed that the revised rule would not apply to any rollover that involved an IRA dis­tri­b­u­tion that occurred before Jan­u­ary 1, 2015.

 

IRS further clarifies the new one-rollover-per-year limit

In Novem­ber, the IRS issued Announce­ment 2014–32, pro­vid­ing fur­ther guid­ance on how the revised one-rollover-per-year lim­it is to be applied. Most impor­tant­ly, the IRS has now clar­i­fied that:

  1. All IRAs, includ­ing tra­di­tion­al, Roth, SEP, and SIMPLE IRAs, are aggre­gat­ed and treat­ed as one IRA when apply­ing the new rule. For exam­ple, if you make a 60-day rollover from a Roth IRA to the same or anoth­er Roth IRA, you will be pre­clud­ed from mak­ing a 60-day rollover from any oth­er IRA–including tra­di­tion­al IRAs–within 12 months. The con­verse is also true–a 60-day rollover from a tra­di­tion­al IRA to the same or anoth­er tra­di­tion­al IRA will pre­clude you from mak­ing a 60-day rollover from one Roth IRA to anoth­er Roth IRA.
  2. The exclu­sion for 2014 dis­tri­b­u­tions is not absolute. While gen­er­al­ly you can ignore rollovers of 2014 dis­tri­b­u­tions when deter­min­ing whether a 2015 rollover vio­lates the new one-rollover-per-year lim­it, this spe­cial tran­si­tion rule will NOT apply if the 2015 rollover is from the same IRA that either made, or received, the 2014 rollover.

The one-rollover-per-year lim­it does not apply to direct trans­fers between IRA trustees and cus­to­di­ans, rollovers from qual­i­fied plans to IRAs, or con­ver­sions of tra­di­tion­al IRAs to Roth IRAs.

 

What this means to you

In gen­er­al, it’s best to avoid 60-day rollovers when­ev­er pos­si­ble. Use direct trans­fers (as opposed to 60-day rollovers) between IRAs, as these direct trans­fers aren’t sub­ject to the one-rollover-per-year lim­it. The tax con­se­quences of mak­ing a mis­take can be significant–a failed rollover will be treat­ed as a tax­able dis­tri­b­u­tion (with poten­tial ear­ly-dis­tri­b­u­tion penal­ties if you’re not yet 59½) and a poten­tial excess con­tri­bu­tion to the receiv­ing IRA.