A recent tax court case decision changed the interpretation of the “one-rollover-per-year” rule, resulting in more restrictions on IRA rollovers.
Starting January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA per year, no matter how many IRAs you have. However, you are still allowed to make as many transfers from trustee to trustee as you want and as many rollovers from traditional IRAs to Roth IRAs (“conversions”) as you want.
According to current law, you can avoid being taxed on funds distributed to you from an IRA if you deposit the funds to another traditional IRA (or the same) within 60 days.
The new restrictions on IRA rollovers come from a recent decision in a tax court case, Bobrow v Commissioner, involving a taxpayer who used a series of IRA rollovers that caught the eye of the Internal Revenue Service. Alvan Bobrow, the taxpayer, assumed his actions were permissible but the judge ruled otherwise. And so, the court invalidated the separate IRA rollover treatment for all taxpayers.
The IRS website says that this court decision means:
• you must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover in the preceding 12 months, and
• you may be subject to the 10% early withdrawal tax on the amount you include in gross income.
Additionally, if you pay these amounts into another (or the same) IRA, they may be:
• excess contributions, and
• taxed at 6% per year as long as they remain in the IRA.
Experts in the field expressed concerns.
“People need to be extremely careful, because there’s no forgiveness for this new mistake,” said Ed Slott, an IRA consultant in Rockville Centre, N.Y.
“It’s easy to forget the 60-day deadline, and then the entire account becomes taxable—plus a 10% penalty if the taxpayer is under 59½,” said Natalie Choate, an IRA expert at Nutter McClennan & Fish in Boston.
For more information on the new rule and how it could affect you, go to the IRS website.
Sources:
IRA One-Rollover-Per-Year Rule
Image by Rhoda Baer
Tags: alvan bobrow, ed slott, internal revenue service, ira, ira rules, irs, natalie choate, retirement, roth ira, traditional ira
