In January 2014, the U.S. Tax Court rendered their interpretation of the one-per-year IRA rollover tax code provision. To allow taxpayers time to transition to this new interpretation, the Internal Revenue Service will apply this decision to rollovers taken after January 1, 2015.
In this article, we're going to explain the decision the U.S. Tax Court rendered concerning Individual Retirement Arrangement (IRA) rollovers. We're going to start with a quick summary of the "rollover" concept. Then we'll explain how this new interpretation can affect rollovers occurring after 2014. Finally, we'll explain what transactions qualify as a rollover.
If done properly, a rollover is a tax-free distribution from one retirement account that is subsequently contributed (rolled into) to an IRA. While a rollover can occur between IRAs, qualifying retirement accounts such as the 401(k), tax-sheltered annuities such as the 403(b), and 457 deferred compensation plans can also be rolled-over into a Traditional IRA.
When the accountholder wishes to move money between accounts, or financial institutions, they have the option of performing a transfer or a rollover. With a transfer, the receiving institution sends a request to the disbursing institution to transmit funds. Transfers do not have to be reported to the IRS, and they're not subject to the 20% IRS withholding rule.
With a rollover, the retirement funds are distributed from the disbursing institution directly to the former accountholder. Rollovers must be reported to the IRS. This ensures the individual receiving funds abides by the rollover rules, and deposits the money into another qualifying retirement account in a timely manner. Generally, individuals are given 60 days to complete the rollover.
The U.S. Tax Court interpretation applies to rollover distributions occurring after January 1, 2015. In the past, the IRS interpreted section 408(d)(3)(B) of the tax code to mean individuals could make one non-taxable 60-day rollover between IRAs in any one-year period on a IRA-by-IRA basis. In Bobrow v. Commissioner, the Tax Court rule this limit applies on an aggregate basis. In other words, once an individual makes a non-taxable 60-day rollover, they need to wait one year before they can make another non-taxable 60-day rollover, even if the transactions involve different accounts.
A rollover that occurs between Roth IRAs counts toward the one-per-year rollover limit, as does a rollover that occurs between Traditional IRAs. A rollover that occurs between a Traditional IRA and a Roth IRA is referred to as a conversion. As such, conversions are not subject to the one-per-year rollover limit. The one-per-year limit also does not apply to rollovers involving qualified plans such as the 401(k), 403(b), or a 457 deferred compensation plan. Finally, trustee-to-trustee transfers are likewise excluded from this requirement as indicated in the table below.
|Rollover Transaction||One-per-Year Limit|
|Traditional IRA to Traditional IRA||Qualifies, accountholder must wait one year to make another non-taxable 60-day rollover|
|Roth IRA to Roth IRA||Qualifies, accountholder must wait one year to make another non-taxable 60-day rollover|
|Traditional IRA to Roth IRA||Does not apply; considered a conversion|
|401(k), 403(b), or 457 to Traditional IRA||Does not apply|
|Trustee to Trustee Transfer||Does not apply|
About the Author - IRA Rollovers: One-Per-Year Limit