Reminder - IRA One-Rollover-Per-Year Rule Began in 2015

This is a reminder to our clients and friends that beginning this year, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. These changes were outlined in IRS Announcements 2014-15 and 2014-32.  The one-rollover-per-year limitation is applied by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. Please note that the following rollovers are exempted from this rule:

Trustee-to-trustee transfers between IRAs are not limited because you do not receive a physical check from the originating IRA to deposit to the new IRA. Therefore, the transfer is not considered a rollover by the IRS. The assets and/or cash are electronically transferred from the old IRA trustee to the new IRA trustee.

Rollovers from traditional to Roth IRAs ("conversions") are not limited (because they generate tax revenue).

Example: If you have three traditional IRAs, (IRA-1, IRA-2 and IRA-3), and you took a distribution from IRA-1 on January 1, 2015 (received a check) and rolled it over into IRA-2 the same day (must be within 60 days), you could not roll over any other 2015 IRA distribution unless the rollover meets one of the above exceptions or the transition rule discussed below.

Transition Rule Related to Rollovers Made in 2014

IRA distributions rolled over to another (or the same) IRA in 2014 will not prevent a 2015 distribution from being rolled over provided the 2015 distribution is from an IRA different from the one involved in the 2014 rollover.

Example: If you have three traditional IRAs (IRA-1, IRA-2 and IRA-3), and in 2014 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 2014 distribution, but you could roll over a distribution from IRA-3. This transition rule applies only to 2014 distributions and only if different IRAs are involved.

Background of the Rollover Rule

Under the basic rollover rule, you do not have to include in income any amount distributed to you from an IRA if you rollover the amount into another eligible plan (includes IRAs and other qualified plans that accept rollovers) within 60 days. Internal Revenue Code (IRC) section 408(d) limits you to one IRA-to-IRA rollover in any 12-month period. The regulations under IRC section 408(d) and IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), had interpreted this limitation as applying on an IRA-by-IRA basis, which meant that  a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual. However, the Tax Court held in 2014 that you cannot make a non-taxable rollover from one IRA to another if you have already made a rollover from any of your IRAs in the preceding 12-month period.

Tax Consequences of Violations

Effective this year, if you receive a distribution from an IRA of previously untaxed amounts:

1. You will have to include the distribution as taxable income if you already made an IRA-to-IRA rollover in the preceding 12 months (unless the transition rule above applies), and
2. If you are under age 59 1/2, you may be subject to the 10% early withdrawal tax on the amounts you include as taxable income.

Additionally, the distributed amounts that you rollover into another (or the same) IRA may be:

1. Treated as an excess contribution to the receiving IRA, and
2. Taxed at 6% per year as long as the impermissible rollover amount remains in the IRA.

Conclusion

As with all things tax, these rules can be complicated and confusing.  It is a good idea to discuss with both your IRA trustee and tax advisor any IRA rollover you are contemplating making before actually taking the distribution.  Further, unless you need the funds for the 60 day rollover period allowed under the IRA rollover rules, it is advisable to simply do a trustee-to-trustee transfer to avoid any possibility of violating the rollover rules.