(This Technical Update is written for institutions which hold and administer IRA funds. It is written at the level of the IRA investor, and can be used to explain the new rollover rules to the investor).
After a recent court decision, the IRS has changed its policies regarding IRA rollovers. The new rules may limit your ability to make certain rollovers between IRAs. This document explains the new rules.
How often can I do an IRA rollover?
There are no limits on making a direct trustee-to-trustee rollover of IRA funds. However, there is a limit on so-called 60-day rollovers. Under the new rules, if you do a 60-day IRA rollover, you cannot do another rollover until 1 year has elapsed from the date you received the distribution in the first rollover. In all the examples below, Beth has $10,000 in an IRA at Bank A and $20,000 in an IRA at Bank B.
Example 1: Beth wants to roll both accounts to a new IRA at Bank C. She instructs Banks A and B to wire her funds to her Bank C IRA. This does not violate the rules. These are direct trustee-to-trustee transfers.
Example 2: Beth withdraws $10,000 from IRA A January 15, 2015. If she rolls it over within 60 days, either to an IRA or to an employer retirement plan, she does not pay tax on the withdrawal. March 1, 2015, she rolls the funds over to Bank C. (This is a 60-day rollover.) March 15, 2015, she withdraws $20,000 from IRA B. She cannot roll the funds over to an IRA (regardless of the institution) because it would be within one year of January 15, 2015, the date of the distribution in the first rollover.
Are some rollovers exempt from these rules?
Yes. The limit applies only to two 60-day IRA-to-IRA rollovers. The following rollovers are all exempt. If either of two rollovers is exempt, then there is no violation. It does not matter whether the first rollover or the second rollover in time was exempt.
· Direct trustee-to-trustee transfer
· Rollover from a conventional IRA to a Roth IRA
· Rollover from an employer plan (e.g., 401(k) or other qualified plan, 403(b) plan, eligible governmental 457(b) plan)
· Rollover to an employer plan
· Rollover from one employer plan to another employer plan
· In-plan Roth rollovers
Does the new rule apply to 60-day rollovers from one Roth IRA to another?
Yes. It also applies to rollovers between two conventional IRAs. It does not apply to a rollover from a conventional IRA to a Roth IRA.
When does the year begin and end?
The year begins on the date the first distribution was received. If you receive an IRA distribution during the one-year period following that date, you cannot initiate a 60-day rollover to another IRA. Notice that what matters, for both the first rollover and the second, is the date you received the distribution, not the date you rolled it over.
What happens if I violate the rule and make two 60-day rollovers in a year?
You will pay tax on the second rollover as though it had never happened. If you are under 59 ½, that means you will likely be subject to a 10% penalty tax as well. The second rollover is invalid, and, if it exceeds your IRA contribution limit, you must withdraw the excess by April 15 of the year following the rollover or face an additional 6% per year penalty.
When does this limit apply?
The new rule applies to IRA distributions on or after January 1, 2015.
Is there a transition rule?
Yes. If you received the distribution for the first 60-day rollover before January 1, 2015, and the second rollover is not from an IRA involved in the first rollover, then the second rollover is exempt.
Example 3: Beth received a $5,000 distribution from the IRA at Bank A on March 15, 2014 and on April 18, 2014, completed a 60-day rollover to an IRA at Bank C. February 15, 2015, Beth receives $4,000 from the IRA at Bank B and completes a 60-day rollover to an IRA at Bank D. The rollover does not violate the limit because of the transition rule.
Example 4: Assume the same facts as Example 3 except the second rollover is from Bank A (or Bank C). The rollover violates the limit, and is invalid, because it is from an institution involved in the first rollover. However, if Beth had waited to receive the distribution from Bank A or C until after March 15, 2015, one year after the distribution in the first rollover, there would have been no violation. Alternatively, Beth could have requested a direct trustee-to-trustee transfer for the second rollover and avoided the issue altogether.
Example 5: Assume the same facts as Example 3 except the second rollover is from Bank B to Bank A (or Bank C). The rollover does not violate the limit because of the transition rule. The IRA from which the rollover came was not involved in the first rollover.
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