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IRS Clarifies IRA Rollover Rule

Friday, November 14, 2014

The Internal Revenue Service (IRS) has issued guidance clarifying the impact a rollover from one Individual Retirement Arrangement (IRA) to another has on the one-per-year limit on tax-free rollovers, after a policy change following a January 2014 decision from the United States Tax Court.

The change from the IRS, announced earlier this year, reflects the Tax Court's decision to preclude an individual from making more than one tax-free rollover in any one-year period, even if the rollovers involve different IRAs.

To help taxpayers by allowing time for transition to the new interpretation, the IRS has announced that it will not apply before January 1, 2015. Before 2015, the one-per-year limit applies only on an IRA-by-IRA basis (that is, only to rollovers involving the same IRAs). Beginning in 2015, the limit will apply by aggregating all of an individual's IRAs, effectively treating them as if they were one IRA for the purposes of applying the limit.

Although an eligible IRA distribution received on or after January 1, 2015, and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual's IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment.

The IRS confirmed that, as before, Roth conversions (rollovers from traditional IRAs to Roth IRAs), rollovers between qualified plans and IRAs, and trustee-to-trustee transfers (direct transfers of assets from one IRA trustee to another) are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

IRA trustees have been encouraged by the IRS to offer IRA owners who request a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.