Shocking new IRS ruling narrows taxpayers’ one free IRA rollover

ira rolloverIRS Tax Court just ruled that the long-standing one-rollover-per-year rule applies to all of a taxpayer’s IRAs rather than to each IRA separately.

Trustee to trustee transfers are not considered rollovers, so there’s still no limit on those.  To review, there are two ways to move money between IRAs:

1. Transfers, which are not reported to the IRS and not reported on a tax return. The IRA owner never touches the money. You can do this as often as you like, whenever you like.

2. And rollovers. With this method, the IRA owner takes the money as a distribution and they have 60-days to rollover (put back) the amount in an IRA. And this, you can do only once per 12-month period.

The IRS, through their publications and regulations, has said for at least 20 years that the rollover method applies on a “per-IRA”
basis. In other words, if you have 10 IRAs, you can do 10 rollovers for the year (12-month period), as long as an IRA does it only once (or the year).  The new ruling applies that once a year status to all accounts.

As we understand it, this new ruling would apply to any taxpayer that receives a distribution from their traditional IRA, utilizes for the 60-day grace period and them deposits the funds into a new IRA under the tax-free rollover guidelines. However, this is not applicable to taxpayers who utilize the trustee-to-trustee direct rollover method, and it appears also does not apply to rollovers of 401(k) and other retirement plans to traditional IRAs. If it’s not a qualified rollover, the amount is subject to income tax and possibly a 10% penalty for early withdrawal if no exceptions apply.

Contact your ShindelRock tax professional if you plan to make an IRA rollover in 2014, and in the meantime, we’ll follow this ruling as the IRS makes further clarifications for the industry.