More Guidance on IRAs and the One-Rollover-Per-Year Rule

Action Needed Prior to January 1, 2015

Recently, the IRS released additional guidance on how it intends to apply its new interpretation of the "one-rollover-per-year" rule to Individual Retirement Accounts (IRAs) beginning in 2015. Announcement 2014-32 addresses specific issues raised by taxpayers and their representatives.

Background

A distribution from a traditional IRA (including a simplified employer pension or SIMPLE IRA) is taxable, as a rule. An exception permits a taxpayer to withdraw tax-free amounts from an IRA to the extent the funds are reinvested within 60 days in either the same IRA or another taxpayer-owned IRA-the so-called "tax-free rollover" exception. However, a taxpayer can only roll over one IRA distribution each year.

In January 2014, the U.S. Tax Court issued a decision holding that the statutory language limiting taxpayers to one IRA rollover per year applies collectively to all a taxpayer's IRAs rather than to each separate IRA. Previously, the IRS and most taxpayers interpreted the limitation as applying separately to each IRA. After the Tax Court's decision, the IRS issued Announcement 2014-15 stating it will follow the court's decision prospectively beginning with IRA distributions occurring after December 31, 2014.

Concerns Addressed

In Announcement 2014-32, the IRS clarifies the following important issues:

• The new interpretation will apply to IRA distributions made on or after January 1, 2015, effectively aggregating all of a taxpayer's IRAs, as if they are one IRA, for purposes of the IRA rollover limit.

• The old interpretation, that the one-rollover-per-year limitation applies on an IRA-by-IRA basis, applies through December 31, 2014.

• A distribution from an IRA in 2014, properly rolled over within 60 days back to the distributing IRA or another IRA, will not limit a distribution and rollover during 2015, except the 2015 distribution must be from a different IRA that neither made the 2014 distribution within the past year nor received the 2014 distribution.

• A rollover from a traditional IRA to a Roth IRA, termed a conversion, is not subject to the one-rollover-per-year limitation, and is disregarded in applying the limitation to other rollovers. A rollover between a taxpayer's Roth IRAs precludes a separate tax-free rollover within the one-year period between the taxpayer's traditional IRAs, and vice versa.

• The one-rollover-per-year limitation does not apply to a rollover to, or from, a qualified plan or to a Trustee-to-Trustee transfer (transfer of assets directly from one IRA trustee to another).

Action Steps

Careful planning for anticipated IRA rollovers is more critical than ever. Taxpayers should use direct transfers from one IRA trustee to another IRA trustee whenever possible in order to avoid the one-rollover-per-year rule. IRA issuers and custodians should review their forms, disclosures and marketing materials in light of the IRS's new guidance. And, consider distribution opportunities prior to the time the more restrictive one-rollover-per-year limitation takes effect on January 1, 2015.

Please contact your Eide Bailly tax professional for assistance with planning IRA rollovers and transfers. 

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