By Darren L. Neuschwander, CPA
There’s an important change in the rules for both traditional and Roth IRA rollovers, which are transactions that let you withdraw funds from one IRA and redeposit them in another IRA without paying income tax on the transaction.
Rollovers are a popular way of moving IRA money around from one investment to another. They are also a way to get a short-term tax-free loan from your IRA as long as you redeposit the funds to the same or another IRA no later than 60 days from the date you made the withdrawal.
One tax-free rollover from an IRA is allowed per year. The one-year waiting period begins on the date you received the IRA distribution, not on the date you roll the funds back into an IRA.
For about 30 years, IRS publications and proposed regulations have supported the general understanding among tax professionals that the one-year waiting period applies separately to each IRA an individual owns. Now, following a recent tax court case (Bobrow, T.C. Memo 2014-21), the IRS stated via Announcement 2014-15 that it will treat all of your IRAs as one IRA for purposes of the one-year waiting period. This more restrictive interpretation to IRA rollovers applies to transactions starting with tax-year 2015 and forward.
Pre-2015 IRA distribution example: Suppose you have four IRAs: A, B, C and D. In March of 2014, you withdrew the balance from A and rolled it over into C within 60 days. In August of 2014, you withdraw the balance from IRA B and roll it over into IRA D within 60 days. Assuming you haven’t previously made any rollovers, neither withdrawal will be taxed because both IRAs A and B are treated separately for purposes of the one-year waiting period.
Post-2014 IRA distribution example: Assume the same facts as in previous example, except the year of the transactions has changed from 2014 to 2015. In this case, the withdrawal from B will be a taxable distribution and also could be hit with a 10% early distribution penalty if you are under the age of 59 ½ . Only the withdrawal from A would be a tax-free rollover. To make matters worse, if the funding of D from the B withdrawal exceeded any allowable regular IRA contribution for 2015, it would be treated as an excess contribution subject to an additional 6% tax unless you withdraw the excess amount by 2015.