Last month, I wrote about the case involving the so-called once-per-year IRA rollover rule (Alvan L. Bobrow, et ux., v. Commissioner, TC Memo 2014-21, Docket No. 7022-11).
The Tax Court ruled that once per year means exactly that.
The rollover rule doesn't apply separately to each of a person's individual retirement accounts but to all of them in aggregate, the court said.
A person can do only one IRA-to-IRA rollover in a one-year period (365 days, not a calendar year) from all of a person's individual retirement accounts. This decision directly contradicts the Internal Revenue Service guidance in IRS Publication 590, in several private-letter rulings and in a proposed regulation.
In the wake of the Bobrow decision, on March 20, the IRS released Announcement 2014-15, which essentially makes the Bobrow decision the rule. The IRS will withdraw its proposed regulation and revise Publication 590 to make its new position clear.
But what if a financial adviser's client has already done multiple “legal” (according to IRS rules, before Bobrow) rollovers from separate IRAs within a year?
The IRS says not to worry.
The new rollover rule change won't be effective until Jan. 1.
Prior to that, proper IRA rollovers from separate IRAs will be OK for everyone, except Mr. and Mrs. Bobrow, who are stuck with their Tax Court loss. Maybe they will appeal.
ROLLOVER DEFINITIONFor the IRA once-per-year rollover rule, a rollover means a distribution from an IRA that is payable to the IRA owner who can then roll those funds over to the same or another IRA within 60 days. This is different than a direct transfer (aka a trustee-to-trustee transfer) of IRA funds to another IRA.
This applies only to rollovers that are limited to one per year (365 days).
By contrast, when funds are directly transferred, there is no limit on these transfers.
The once-per-year rule doesn't apply to direct transfers, so this new IRS guidance also doesn't apply to direct transfers, as the IRS reminds us in this statement contained in the new 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.”
That is why clients should use direct transfers only to move IRA funds from one IRA to another. This has always been good advice and is now even more so.
The once-per-year IRA rollover rule applies only to rollovers from IRA to IRA or Roth IRA to Roth IRA. IRA-to-IRA also includes simplified employee pension (SEP) and savings incentive match plan for employees (Simple) IRAs.
The once-per-year IRA rollover rule doesn't apply to rollovers to or from an employer plan such as a 401(k), and it doesn't apply to a rollover from an IRA to a Roth IRA, which is a Roth IRA conversion. The rule also doesn't apply to first-time-homebuyer distributions that are canceled or delayed, and qualified reservist distributions that are repaid in a timely manner.
When the rule was announced, advisers asked, “What about Roth IRAs?”
The IRS didn't address that in the announcement but did cover that later in a posting on its website, clarifying that the once-per-year rollover rule applies separately to traditional IRAs and Roth IRAs.
A person with both IRAs and Roth IRAs can do one IRA-to-IRA rollover per 365 days and one Roth IRA-to-Roth IRA rollover per 365 days.
Going forward, individuals will get only one shot per year.
The IRS website posting also reminded taxpayers that running afoul of the once-per-year rule can not only subject the distribution to income tax and a possible 10% penalty if under 591/2 but could also result in an excess contribution to an IRA, which would trigger the 6% penalty for each year that the ineligible funds remained in the IRA. Unlike 60-day rollover problems, the IRS has no authority to waive violations of the once-per-year rule.
Also, advisers should warn new clients about rolling their IRA funds over to them.
Ask if any funds have been rolled over from any IRA in the past year. If so, the only way to bring these funds over is with a direct transfer.
Notify and educate clients immediately, especially those who have previously been doing allowed multiple IRA-to-IRA rollovers from separate IRAs, and halt that process.
Mistakes will be costly, as they can't be fixed.
Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group to help financial advisers and insurance companies become recognized leaders in the IRA marketplace. He can be reached at irahelp.com.