IRS Looks at Rollovers Differently Now

April 30, 2014

How the IRS interprets the “one rollover per year” rule when referring to IRA tax-free rollovers changes beginning on Jan. 1, 2015 – even though the original rule that only one tax-free rollover is permitted per year has not changed.

The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll it back into another IRA.

However, the IRS has previously said that the one-year waiting period applies separately to each of your IRAs. The Tax Court has interpreted the rule differently. As a result of a recent court decision (Alvan L. and Elisa Bobrow v. Commissioner, TC Memo 2014-21, Jan. 28, 2014), the one-year waiting period has been revised.

The IRS now says in Announcement 2014-15 that it will follow the Tax Court’s interpretation and treat all of your IRAs as one IRA for purposes of the one-year waiting period. However, the IRS will not apply this more restrictive interpretation to any rollover that involves a distribution from an IRA before Jan. 1, 2015.

If you use a rollover to transfer IRA money from one custodian to another or to get a short-term tax-free loan from your IRA, the withdrawal must be reported on your tax return. But it’s treated as a tax-free transaction if you redeposit the amount you withdrew from the IRA into the same or another IRA no later than 60 days after the date you made the withdrawal.

Under the Tax Court decision, the 60-day rule remains unchanged. If you fail to redeposit the funds within the 60-day time frame, the IRS can choose to waive the 60-day requirement under some circumstances, such as an error by your financial institution – but there are no guarantees.

Rollovers between Roth IRAs are subject to the same 60-day rule and one-year waiting period that apply to rollovers between traditional IRAs. After 2014, all of your Roth IRAs will be treated as one Roth IRA for purposes of the one-year waiting period between rollovers.

Rollovers from employer retirement plans to IRAs do not count for purposes of the one-year waiting period. Similarly, conversions of regular IRAs to Roth IRAs are not considered.

In addition, the one-year waiting period does not apply to trustee-to-trustee transfers between traditional IRAs or between Roth IRAs. These tax-free transfers, made directly from one financial institution to another, can be made any time and are not reported on your tax return.