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December 16, 2014

IRA rollover rules change in 2015

IRS previously held that the timing rules applied separately to all IRAs owned by an individual.  They applied the rule to each IRA owned.  The Internal Revenue Code allow a tax-free distribution if the distribution is rolled into an IRA within 60-days.  The tax-free rollover is not allowed if you’ve already completed a tax-free rollover within the previous one-year (12-month) period.  The Tax Court held a taxpayer may make only one nontaxable 60-day rollover within each 12-month period regardless of how many IRAs an individual owns (Bobrow v. Commissioner).  The IRS will not apply the revised rule prior to 2015.

IRS issued guidance on how the revised one-rollover-per-year limit is to be applied (Announcement 2014-32).
The clarification includes the following:
1)  All IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, are aggregated and treated as one IRA when applying the new rule.
2) The exclusion for 2014 distributions is not absolute.  Generally you can ignore rollovers of 2014 distributions when determining whether a 2015 rollover violates the new one-year-rollover-per year limit.  This special transition rule will not apply if the 2015 rollover is from the same IRA that either made or received, the 2014 rollover.

The one-rollover-per-year limit does not apply to direct transfers between IRA trustees and custodians, rollovers from qualified plans to IRAs, or conversions of traditional IRAs to Roth IRAs.

In general, it’s best to avoid 60-day rollovers whenever possible.  Use direct transfers (as opposed to 60-day rollovers) between IRAs, as these direct transfers aren’t subject to the one-rollover-per-year limit.  The tax consequences of making a mistake can be significant.  A failed rollover will be treated as a taxable distribution (with potential early-distribution penalties if you’re not yet 591/2) and a potential excess contribution to the receiving IRA.