By Jean Pierre Choutedjem
In a recent case, the Tax Court ruled that code Sec. 408(d) (3) (B), which deals with limitations on rollover contributions to an individual retirement account (IRA), applies to all of a taxpayer’s IRAs not to each individual IRA. The IRS has announced that it will follow the Tax Court holding that all of a taxpayer’s IRAs must be grouped together for purposes of the one-rollover per year limitation. However, the one-year wait period applies separately to all traditional IRAs and all Roth IRAs.
Rollovers are the most popular way to move IRA money from one investment account to another. They can also be considered a short term tax-free loan from the IRA. An IRA distribution is normally included in gross income on a taxpayer’s individual tax return. The distribution is treated as a tax-free transaction only if (1) the money withdrawn from the IRA is redeposited into the same or another IRA no later than 60 days after the date of the withdrawal and (2) the tax free rollover is only done once during the year. The one-year wait period begins on the date the taxpayer receives the IRA distribution, not the date it is rolled back into another account.
For many years, the IRS had taken the position that the one-year waiting period applied separately to each IRA owned by the taxpayer. For instance, suppose in February of 2014, a taxpayer withdrew the balance from IRA- X and rolled it over into IRA-Z within 60 days. In July of 2014, the taxpayer withdrew the balance from IRA-Y and rolled it over into IRA-D within 60 days. No other rollovers were made. Neither withdrawal would be taxed because IRA-X and IRA-Y were treated separately for purposes of the one-year waiting period.
Effective January 1, 2015, the one-year wait period between IRA rollovers will apply to all IRA accounts in aggregate and would only allow one rollover within a year. Therefore, if a taxpayer were to make the same two rollovers described above in 2015, all of the IRAs would be treated as one when applying the one-year limitation so only the distribution from the first IRA would be tax-free. The distribution from the second IRA would be taxed. Depending on the circumstances, the distribution could also incur a 10% early withdrawal penalty. In addition, the rollover of the second distribution into an IRA, to the extent it exceeded any allowable regular contribution you could make to an IRA for 2015, would be treated as an excess contribution subject to a 6% tax unless withdrawn by the return due date for the year of the attempted rollover.
Lastly, the revised one-year wait period limitation does not apply to trustee-to-trustee transfers between traditional IRAs or between Roth IRAs.
The revised rules for IRA rollovers reinforce the need to speak with a tax professional before moving around retirement funds. Please contact our office at your convenience to arrange for a retirement planning discussion.