New tax rules will affect IRA rollovers starting Jan. 1, 2015
Currently, taxpayers are allowed to roll over their IRA funds into another qualified IRA account tax free as long as all of the following have been met:
- The funds taken out of the old IRA (IRA A) are deposited into a qualified new IRA (IRA B) within 60 days.
- The taxpayer has not rolled funds out of IRA A into another IRA tax free within one year prior.
The IRS has historically applied these rules on an IRA-by-IRA basis, meaning that a taxpayer could have multiple rollovers in a one year time period, as long as only one rollover was made per IRA. For example, Bob owns IRA-1 and IRA-2. He decides to rollover IRA-1 into IRA-3 as well as IRA-2 into IRA-3 (or any other IRA) in the same one-year period. This is allowed under the current rules.
A recent tax court ruling provided that the above rules will be applied on an aggregate basis and NOT on an IRA-by-IRA basis. Under this ruling and using the same example above, Bob would not be able to rollover both IRAs tax free in the same one-year period. He would only be able to rollover one tax free. If he happened to rollover both in the same one-year period, the second rollover would generate taxable income in the amount rolled over.
It’s important to note that the one-rollover-per-year rule does not apply to direct transfers from one IRA trustee to another since these are not considered to be rollovers.
So, how does this affect taxpayers?
As a result of this ruling, the IRS is expected to issue new regulations to correspond with the recent tax court ruling. However, they are not expected to apply the new regulations until at least January 1, 2015. Therefore, if you are thinking of rolling over multiple IRAs, you may want to do this before the new regulations are expected to go into effect on January 1, 2015. There are several other considerations to take into account before rolling over your funds (like making sure you have not rolled over the current IRA within the last year) so please consult with your tax advisor or ShindelRock professional.