Caution: New IRS rules for IRA rollovers come with risks for advisers

Guidance from the IRS on its one-IRA-rollover-per-year rule requires advisers to know where clients' money has been or risk a snafu that could sever that relationship.

The Internal Revenue Service has published further guidance on its new one-IRA-rollover-per-year rule, but financial advisers beware: You must ask clients key questions on where their money has been or risk a snafu that could sever that relationship.
Back in March, the IRS announced that an individual can do only one rollover from one IRA to another in 365-day period, noting that the rule wouldn’t apply before Jan. 1, 2015. That announcement came on the heels of a pivotal Tax Court case, Alvan L. Bobrow and Elisa S. Bobrow v. Commissioner of Internal Revenue.
The regulation only applies to rollovers from one IRA to another, as well as one Roth IRA to another. Rollovers out of retirement plans and Roth conversions aren’t covered under this rule.
The latest announcement from the IRS provides additional clarity on the timing and application of the regulation.
For one thing, the agency confirmed that the rule will take effect on Jan. 1, putting to rest advisers’ concerns that rollovers made anytime in 2014 might be subject to the regulation. This way, if you complete a rollover today for one client, another rollover that’s completed in January for the same client won’t be considered a “second rollover” under the IRS’ regulation, noted Ed Slott, an IRA expert at Ed Slott and Co.
“This will give IRA owners a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs,” the IRS noted in a statement.
Further, the IRS’s announcement clarifies that the rule applies to all of a given client’s IRA accounts. Previously, some people thought that the rules applied individually to IRAs and Roth IRAs, hence permitting one IRA-to-IRA rollover and one Roth-IRA-to-Roth-IRA rollover. That’s not the case, says Mr. Slott. You get only one of these transactions per 365-day period.
Even with the IRS’ clarification, Mr. Slott anticipates clients and advisers alike will make costly missteps in 2015.
“I have a bold prediction: Many people will lose their IRA on this [rule] and many advisers will be caught flat-footed because they’re not asking questions about new accounts,” he said.
Though rollovers completed through the remainder of the year are acceptable, financial advisers need to go over the regulation and talk to their clients and prospects about its implications.
Clients who are moving an IRA and who end up getting a check need to ensure that the check is being made to the receiving IRA and not to them personally. A check made directly to the client is considered a rollover, and the rules will apply. A check made to an institution, however, is considered a trustee-to-trustee transfer.
The limit on IRAs next year will require advisers to handle rollovers as a direct transfer from one trustee to another, Mr. Slott said.
Advisers should also ask clients about their rollover activities and find out where any new money is coming from.
“We can go from the best scenario to the worst: You get the $1 million IRA rollover and the first thing to happen in your relationship is that the client loses the IRA [to taxes] because you didn’t ask where the money has been and whether it’s been rolled over,” Mr. Slott said.