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IRA Rollovers: Rule Change

(posted: May 22nd, 2015)


Following up on a 2014 Tax Court decision, the IRS is taking a tougher stance on the once-a-year rule for IRA rollovers in 2015.

The IRS issued a new ruling late in 2014 providing guidance.

Here's the Whole Story

Generally, you don't have to pay any tax when you roll over funds between IRAs, as long as the rollover is completed within 60 days. You can do whatever you want with the money during this 60-day period. Furthermore, it doesn't matter if you put the funds back in the same IRA or in a different one. But the tax law limits such rollovers to one a year.

Previously, the IRS stated that this once-a-year rule applied separately to each IRA. However, in the 2014 decision, the Tax Court extended the restriction to all IRAs owned by the same taxpayer.

Facts of the Case

In 2008, Mr. Bobrow received a distribution from traditional IRA No.1 on April 14. Then he took a distribution from IRA No.2, on June 6. Bobrow redeposited the required amounts back into IRA No.1 on June 10 and IRA No.2 on August 4.

Bobrow thought he was in the clear because both deposits were made within the 60-day deadline for IRA rollovers. He paid zero tax relating to IRA distributions on his 2008 return. But the Tax Court said that a literal reading of the once-a-year limit on IRA rollovers invalidated the transfer to IRA No.2. Therefore, that distribution was fully taxable.

The IRS also provided the following guidelines:

  • A conversion from a traditional IRA to a Roth IRA is not subject to the once-a-year-rule (although it does apply to rollovers between Roth IRAs).
  • A rollover to or from a qualified retirement plan, like a 401(k), is not subject to the once-a-year rule.
  • A trustee-to-trustee transfer from one IRA to another is not subject to the once-a-year rule. Note: Technically, such a transfer is not a rollover.

If you don't have an immediate need for the money, a trustee-to-trustee rollover is usually the best route to take.

A "trustee-to-trustee" rollover or transfer goes directly from the current IRA account to the new IRA account without any disbursement of funds to you.

Tip: IRA rollovers are subject to withholding unless you elect out of it. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.

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