IRA moves that won’t get you in trouble

Earlier this year, the retirement industry was surprised by a Tax Court ruling that changed the interpretation of the number and timing of rollovers an individual retirement account owner could direct. The tax court determined that IRA rollovers are limited to one per individual, per year. Prior guidance, including in IRS Publication 590, interpreted the rules to allow one rollover per account. On March 20, the IRS released announcement 2014-15, indicating that the IRS will begin to apply the Bobrow interpretation to rollovers starting Jan. 1, 2015.
(See IRA expert Ed Slott’s take on the Tax Court’s decision and IRS response.)
For the once-per-year IRA rollover rule, a rollover means a distribution from an IRA that is payable to the IRA owner and rolled over to the same or another IRA within 60 days. This is different than a direct transfer (or trustee-to-trustee transfer) of IRA assets from one IRA to another IRA. That means that when assets are directly transferred between trustees or custodians, there is no limit on the number of transfers an IRA owner can make.
The IRS notes this in a statement within the announcement: “These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.”

PENALTIES CAN BE SUBSTANTIAL
IRA owners ignoring the once-per-year IRA rollover rule will not only subject the distribution to federal income tax and a possible 10% penalty if the IRA owner is under the age of 59 1/2, but the rollover could also be deemed an excess contribution to an IRA. Excess contributions trigger a 6% penalty for each year that the ineligible rollover amount remains in the IRA. In addition, under the current rules, the IRS has no authority to waive violations of the once-per-year rule.
The once-per-year IRA rollover rule applies to IRA-to-IRA or Roth IRA-to-Roth IRA rollovers and also includes rollovers to Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
(See also: Tax strategies for high-net-worth retirees are aplenty)
The once-per-year IRA rollover rule does not apply to the movement of money to or from an employer-sponsored retirement plan such as a 401(k), and it also does not apply to the movement of money from an IRA to a Roth IRA, known as a Roth IRA conversion. The rule also does not apply to first-time-home buyer distributions that are canceled or delayed or qualified reservist distributions that are repaid in a timely manner.
The once-per-year IRA rollover rule is applied separately to traditional IRAs and Roth IRAs. A person with both a traditional IRA and a Roth IRA can do one traditional IRA-to-traditional IRA rollover per 365 days and one Roth IRA-to-Roth IRA rollover per 365 days.
In the past, your clients may have established multiple IRAs to take distributions and then rollover the assets into another IRA within 60 days, multiple times with multiple IRAs as it was an allowed practice documented in IRS Publication 590. Now, with the Bobrow decision, the Tax Court has ruled that all traditional IRA (or Roth IRA) assets are viewed as one traditional IRA (or Roth IRA) and the one-per-year rule applies to the individual owning the IRAs, not per account.
YOUR ACTION PLAN
• Educate clients on the new rule so they clearly understand the differences between rollovers and transfers. This is especially important for clients who in the past have used their IRAs for short-term borrowing. But this is also important for clients who may want to change IRA trustees or custodians because of the availability of a particular investment.
• When possible, encourage trustee-to-trustee transfers and ensure checks are made payable directly to the IRA rather than your client.
• Confirm what, if any, tax reporting is being provided by the previous firm or employer plan. This may give you a clue as to how the firm is processing the movement of the IRA assets. A distribution generates an IRS Form 1099-R; a trustee-to-trustee transfer does not.
The consequences to clients of ignoring this ruling could be devastating and irreversible. However, through education and careful execution, IRAs can still be easily moved via unlimited trustee-to-trustee transfers.
Robert Cirrotti is a director for Pershing, a BNY Mellon company, where he leads Retirement Solutions.