How the New One-a-Year IRA Rollover Rule Applies

From the IRS

The IRS clarified how the change in the way it interprets the statutory one-rollover-per-year rule for individual retirement arrangements (IRAs) affected 2014 rollovers and how the rules apply in 2015 (Announcement 2014-32).

Sec. 408(d)(3)(A)(i) permits a tax-free rollover of funds in a taxpayer’s IRA as long as the amount distributed to the taxpayer is paid into an IRA for the taxpayer’s benefit within 60 days, subject to the one-rollover-per-year limit of Sec. 408(d)(3)(B). Prior IRS guidance had applied this rule on an IRA-by-IRA basis. However, the Tax Court in Bobrow, T.C. Memo. 2014-21, applied the rule on an aggregate basis, meaning no matter how many IRAs a taxpayer has, the taxpayer is limited to one rollover per year. In March 2014, the IRS announced it would follow the Bobrow decision by, among other things, amending the proposed regulation that had provided otherwise (see Announcement 2014-15 and REG-209459-78).

The application of the one-rollover-per-year limit on an aggregate basis started in 2015, meaning that an individual receiving an IRA distribution on or after Jan. 1, 2015, cannot roll over any portion of the distribution into an IRA if in the preceding one-year period, the individual had received a distribution from any IRA that was rolled over into another IRA. As the IRS specifically noted in Announcement 2014-32, a rollover between an individual’s Roth IRAs would preclude a separate rollover within the one-year period between the individual’s traditional IRAs, and vice versa.

The announcement also contains a transition rule. For 2015, the IRS will disregard a distribution occurring in 2014 that was properly rolled over to another IRA, in determining whether a 2015 distribution can be rolled over, as long as the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. The aggregation rule applies to distributions from different IRAs only if each distribution occurs after 2014.

The IRS made it clear that this new rule does not apply to Roth conversions, trustee-to-trustee rollovers, or rollovers between qualified plans and IRAs. It also explained that trustee-to-trustee rollovers include both direct transfers between trustees and rollovers where the IRA issues a check payable to the IRA trustee. The IRS is encouraging IRA trustees to offer to do direct rollovers to individuals requesting rollover distributions so that account holders will not be subject to these rules.