In Retirement News for Employers, December 18, 2014 Edition, the Internal Revenue Service (“IRS”) discuss the one-rollover-per year rule that applies to IRAs. Here is what the IRS says:
Beginning in 2015, 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 (IRS Announcements 2014-15 and 2014-32). The limit will apply 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.
• Trustee-to-trustee transfers between IRAs are not limited • Rollovers from traditional to Roth IRAs (“conversions”) are not limited
Transition rule ignores some 2014 distributions
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 a different IRA 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 a year 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. So if you took a distribution from IRA-1 on January 1, 2015, and rolled it over into IRA-2 the same day, you could not roll over any other 2015 IRA distribution (unless it’s a conversion).
Background of the one-per-year rule
Under the basic rollover rule, you don’t have to include in your gross income any amount distributed to you from an IRA if you deposit the amount into another eligible plan (including an IRA) within 60 days (Internal Revenue Code Section 408(d)(3)). Internal Revenue Code Section 408(d)(3)(B) limits taxpayers to one IRA-to-IRA rollover in any 12-month period. Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), published in 1981, and IRS Publication, Individual Retirement Arrangements (IRAs) interpreted this limitation as applying on an IRA-by-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 in 2014 that you can’t 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 1-year period (Bobrow v. Commissioner, T.C. Memo. 2014-21).
Tax consequences of the one-rollover-per-year limit
Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts:
• you must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months (unless the transition rule above applies), and • you may be subject to the 10% early withdrawal tax on the amounts you include in gross income.
Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be:
• treated as an excess contribution, and • taxed at 6% per year as long as they remain in the IRA.
Direct transfers of IRA money are not limited
This change won’t affect your ability to transfer funds from one IRA trustee directly to another, because this type of transfer isn’t a rollover (Revenue Ruling 78-406). The one-rollover-per-year rule of Internal Revenue Code Section 408(d)(3)(B) applies only to rollovers.