IRS PROVIDES GUIDANCE ON ANNUAL IRA ROLLOVER LIMITBondBeebe
Kelly Lopez, CPA
IRS Issued Announcement 2014-32 last week, which provides guidance on the IRA one-rollover-per-year Rule.
Generally, you are not allowed to withdraw money from an IRA until you reach age 59 1/2. If you do, the cash is subject to a 10% penalty in addition to tax, making early distributions potentially very costly.
If a distribution from an IRA is paid directly to you, you can avoid the related tax and penalty as long as you deposit the distribution in an IRA or other retirement plan within 60 days. One key component of this rule is that this type of rollover can only be done once within the same 12-month period.
In the past, IRS took the position that the annual limit applied to each IRA account. Thus, taxpayers with several IRA accounts could roll each one over in the same 12-month period without penalty if it was properly done within the 60-day period.
However, earlier in 2014, as a result of the Tax Court opinion in “Bobrow v. Commissioner,” the IRS changed its position on this type of rollover. Now the one-rollover-per year rule will apply to each taxpayer, instead of each IRA. In essence, if you own several IRA accounts you will only be able to roll over one account each year and still avoid penalties. Furthermore, if you make more than one IRA rollover in the same year, depositing the funds into another IRA will be considered an excess contribution, which is assessed an additional 6% penalty on top of the initial tax and 10% penalty.
Last week’s announcement offers transitional relief for taxpayers. It clarifies that this new rule will apply to distributions taken beginning January 1st, 2015. Thus, any distributions from an IRA received during 2014 and properly rolled over within 60 days to another IRA will have no impact on any distributions and rollovers during 2015, giving IRA owners a fresh start in 2015.
The new rule does not apply to trustee-to-trustee transfers between IRAs, as there continues to be no annual limit on those types of rollovers. Thus, a good way to avoid this limitation is to arrange for your IRA management company to directly send the money to another company. Also, keep in mind that conversions from traditional to Roth IRAs remain unaffected.
This transitional guidance gives you the opportunity to consolidate your IRAs before the end of the year. We encourage you to discuss this and other planning opportunities with your tax professional before time runs out.