IRS clarifies application of once-a-year limit on IRA rollovers

The IRS has issued follow-up guidance that clarifies the application of the one-per-year limit on individual retirement account (IRA) rollovers.

Code Sec. 408(d)(3)(B) provides that an individual is permitted to make only one rollover from an IRA in any one-year period. In Bobrow v. Commissioner, the Tax Court held that this limit applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding one-year period. The IRS previously announced that it intended to follow the Tax Court’s holding and provided transition relief to IRA owners (see IRS Announcement 2014-15). In that Announcement, the IRS stated that it would not apply the Bobrow interpretation of Code Sec. 408(d)(3)(B) to any rollover that involved an IRA distribution occurring before January 1, 2015. The IRS has issued follow-up guidance that is intended to address certain concerns that have arisen since the release of Announcement 2014-15.

IRS provides IRA owners with fresh start for rollovers in 2015

The IRS will apply the Bobrow interpretation of Code Sec. 408(d)(3)(B) for distributions that occur on or after January 1, 2015, which means that an individual receiving an IRA distribution on or after January 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding one-year period that was rolled over into an IRA. Thus, the effect of a rollover distribution in 2014 would extend into 2015. However, the IRS has provided a transition rule for distributions in 2015 under which a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over under Code Sec. 408(d)(3)(A)(i), provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. In other words, the Bobrow aggregation rule, which takes into account all distributions and rollovers among an individual’s IRAs, will apply to distributions from different IRAs only if each of the distributions occurs after 2014. This will give IRA owners a fresh start in 2015 in applying the one-per-year rollover limit to multiple IRAs.

Roth IRAs

The IRS explained that, although a conversion rollover from a traditional IRA to a Roth IRA is not subject to the one-per-year limit and is disregarded in applying the one-rollover-per-year limitation to other rollovers, a rollover between an individual’s Roth IRAs would preclude a separate rollover within the one-year period between the individual’s traditional IRAs (including SEPs and SIMPLE IRAs), and vice versa.

Qualified plans

According to the IRS, the one-rollover-per-year limitation also does not apply to a rollover to or from a qualified plan (and such a rollover is disregarded in applying the one-rollover-per-year limitation to other rollovers), nor does it apply to trustee-to-trustee transfers. The IRS encouraged IRA trustees to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. The IRS noted that IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.

Source: IRS Announcement 2014-32.

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