New Once-Per-Year IRA Rollover Rule
Apr 22, 2014
In the aftermath of the recent tax court case, Bobrow v. Commissioner, the IRS announced it will adopt the taxcourt’s ruling and issue new Proposed Regulations that will definitively apply the 1-year IRA rollover rule on an IRA-aggregated basis going forward.
Under current ruling the Internal Revenue Code (IRC) permits an individual one rollover distribution from one IRA to another IRA within a one year period. Additionally, 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, the IRS has taken the position over many years that an individual with multiple IRA accounts can apply the rollover rule to each IRA account without having to include the amount distributed to them within their gross income. For example, if you have four (4) IRAs, you can do four (4) rollovers for the year (1-year IRA rollover rule).
However, the U.S. Tax Court held otherwise and the IRS now intends to follow the Tax Court’s interpretation. As a result:
• 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.
Please note that the above mentioned rules do not apply to transfers such as trustee to trustee transfers or “direct rollovers” wherein an IRA custodian sends the money directly to another IRA without the taxpayer taking possession. Caution is only necessary for those taxpayers considering taking a distribution then rolling those funds over to the same or another IRA within 60 days.
By: Katie Mokry, Accountant