UPDATED: Change in IRA Rollover Rules for 2015

If you are in the habit of annually rolling over funds in multiple IRAs, you may need to start using trustee-to-trustee transfers instead. This is because IRS will enforce a limit on the total number of rollovers in any 12 month period.

As noted on the IRS website, beginning as early as January 1, 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. You can, however, continue to make as many trustee-to-trustee transfers between IRAs as you want. You can also make as many IRA to Roth IRA conversions (rollovers from traditional IRAs to Roth IRAs) as you want each year.

In terms of what kind of year the IRS means, the actual IRS code section (IRC 408(d)(3)(B)) states per “1-year period” from the date of the last 60 Day Rollover. As a result, the rule is not really “one per tax year” but more that one can be every 12 months, that is 1-year following the last 60 Day Rollover conducted by the IRA owner.

This may be especially problematic for clients, especially retirees, who own multiple IRA certificates of deposit (“CD”) accounts. Frequently when one CD matures, the bank or financial institution issues a check directly to the retiree. The retiree then deposits the money into a new IRA CD that may be offer a better rate or shorter term.

Previously, if you had more than one IRA you could do one IRA rollover annually for each IRA. IRS’ new rule now restricts the rollover to one a year per investor, not per IRA.

While IRS is allowed to waive the 60-day deadline, and the waiver is automatic for financial institution errors, it is best not to rely on an automatic extension and make a formal request.

Finally, the new rule can be avoided by making trustee to trustee transfers, direct wire transfers, or transfers between financial institutions firms, provided the owner of the accounts never has access to the funds. Direct transfers such as these are not subject to the 60-day limitation or one-year rollover rule. However, errors can be costly, so consult your financial adviser before making any transfer

IRS will start enforcing this procedure, which the law of the land due to a new Tax Court ruling, in 2015.

The full IRS announcement is reprinted below:

Application of One-Per-Year Limit on IRA Rollovers

Announcement 2014-15

This announcement addresses the application to Individual Retirement Accounts and Individual Retirement Annuities (collectively, “IRAs”) of the one-rollover-per-year limitation of § 408(d)(3)(B) of the Internal Revenue Code and provides transition relief for owners of IRAs.

Section 408(d)(3)(A)(I) provides generally that any amount distributed from an IRA will not be included in the gross income of the distributee to the extent the amount is paid into an IRA for the benefit of the distributee no later than 60 days after the distributee receives the distribution. Section 408(d)(3)(B) provides that an individual is permitted to make only one rollover described in the preceding sentence in any 1-year period. Proposed Regulation § 1.408-4(b)(4)(ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs) , provide that this limitation is applied on an IRA-by-IRA basis. However, a recent Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21, held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period. The IRS anticipates that it will follow the interpretation of § 408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation. These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B). See Rev. Rul. 78-406, 1978-2 C.B. 157.

The IRS has received comments about the administrative challenges presented by the Bobrow interpretation of § 408(d)(3)(B). The IRS understands that adoption of the Tax Court’s interpretation of the statute will require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, which will take time to implement. Accordingly, the

IRS will not apply the Bobrow interpretation of § 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before January 1, 2015. Regardless of the ultimate resolution of the Bobrow case, the Treasury Department and the IRS expect to issue a proposed regulation under § 408 that would provide that the IRA rollover limitation applies on an aggregate basis. However, in no event would the regulation be effective before January 1, 2015.

DRAFTING INFORMATION

The principal author of this announcement is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this announcement may be sent via e-mail to RetirementPlanQuestions@irs.gov.

NOVEMBER 13, 2014 UPDATE: Updates to the IRS announcement can be found here.