Glenn Bailey, CPA

A Tax Court ruling in January 2014 (Bobrow; TC Memo 2014-21) changed long-standing IRS rules defining when and how often you can rollover money tax-free from one IRA to another.

A “rollover” is defined here as withdrawing money from an IRA and then re-depositing it in the same or a different IRA within 60 days of the original withdrawal. These are considered tax-free transactions and are generally used to change the investment custodian or manager. They are occasionally used as a short term loan. You are allowed to do this once in a 12 month period.
The new ruling groups all of a person’s IRAs together as one, meaning that when you withdraw money and do a rollover of the funds, you can’t withdraw and rollover any other funds from any IRA until 1 year from the original withdrawal date. The second withdrawal would be taxable, if done within that one-year period. All IRAs owned by an individual are aggregated together under this rule, both traditional and Roth.

The prior rule provided by IRS allowed one rollover from each IRA a taxpayer owned in the one year period. Many advisors are familiar with the old rule and may not be aware of this change. It is critical that you make sure you are eligible for a rollover prior to withdrawing funds to avoid an unintended taxable IRA withdrawal.

Fortunately, IRS issued Announcement 2014-15 (PDF) saying that they would delay enforcing the new rule until 2015, meaning any distributions taken prior to January 1, 2015 could be treated as a rollover under the old rule.

This ruling does not affect a “trustee to trustee transfer” of IRA funds where the beneficiary never receives possession of the funds, as these aren’t considered distributions or rollovers. It also doesn’t affect a rollover from a 401(k) or other pension plan to an IRA. These can still be done at any time and without limitation. Conversion of a traditional IRA to a Roth is a taxable event and is not considered a rollover either.

If you are planning to rollover IRA funds in the future, especially if you intend to use the funds during the 60-day rollover window, be sure you and your advisors are fully informed on the rules for tax-free treatment. If you just want to transfer funds between IRA accounts, ask for a trustee to trustee transfer to avoid potential pitfalls. While most rollovers are still tax-free, if you have multiple IRAs, these new rules make it increasingly important to be strategic regarding withdrawals and transfers.

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