As you may know, amounts transferred between traditional IRAs, either by rollover or trustee-to-trustee transfer, are typically excluded from an individual’s gross income. However, based on a recent interpretation of the IRA rollover rules by the U.S. Tax Court and, subsequently, the Internal Revenue Service, beginning as early as January 1, 2015, an individual will only be able to make one rollover from a traditional IRA to another (or the same) traditional IRA in any 12-month period, regardless of the number of IRAs owned. A similar limitation will apply to rollovers between Roth IRAs. Taxpayers can, however, continue to make as many trustee-to-trustee transfers between IRAs as desired. This U.S. Tax Court decision is a reversal from the position that the IRS had set forth in their own publication and proposed temporary regulations.
IRA Rollover Rules
Section 408(d)(3)(B) of the Internal Revenue Code limits rollovers from one IRA into another IRA to one in any 1-year period. As provided in Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), the IRS interpreted this statutory limitation as applying separately to each IRA. In other words, you don’t have to include in your gross income any amount distributed to you from a traditional IRA if you deposit the amount into another (or the same) traditional IRA within 60 days. Taken at face value this would mean a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual. Unfortunately, the U.S. Tax Court held otherwise and the IRS supported the position.
As a result of above-mentioned decision:
- beginning January 1, 2015, you will have to include in gross income any amounts distributed from an IRA to be rolled over to another IRA, if you made an IRA-to-IRA rollover in the preceding 12 months, and
- depending on your age and circumstances, you also may be subject to the 10% early withdrawal tax on the amount you have to include in gross income.
This change in position is likely to impact a significant number of individuals, specifically; those individuals who are attempting to consolidate their accounts or simply do not know the difference between a rollover and a trustee-to trustee transfer. Please contact your Schneider Downs representative if you would like to discuss this and other IRA or qualified plan rollover options.
© 2014 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.