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IRS Clarifies the One Year Limit on IRA Rollovers

US Tax Court overrules liberal interpretation by IRS dating back to 1981.  New rule could cause tax-free rollovers to become taxable!

In response to a Tax Court opinion rendered early 2014, the IRS recently issued new rules governing the ability of IRA owners to engage in tax-free rollovers.  Under the new rules provided in the Tax Code, IRA owners are limited to one tax-free rollover per year.

Prior to the issuance of these new rules, the IRS applied this restriction on an IRA-by-IRA basis.  For example, if someone had more than one IRA account, the IRS allowed the owner one rollover per year for each IRA.

In a decision rendered in January of this year, the U.S. Tax interpreted the Tax Code provision more narrowly in that an individual could only make one tax-free rollover in any one-year period regardless of the number of different IRA accounts.

To avoid punishing taxpayers who followed the earlier IRS interpretation, the IRS announced it would not begin applying the Tax Court’s interpretation until 2015.  So any rollover initiated during 2014 and properly rolled over (normally within 60 days) to another IRA, even though there may have been another rollover earlier in 2014 will not create any tax problems.  In other words, IRA owners will be able to make a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs.

Starting in 2015, however, taxpayers will be limited to one tax-free rollover in a 12-month period.  Subsequent rollovers from any of the individual's IRAs (including both traditional and Roth IRAs) received within one year after the first rollover will not get tax-free rollover treatment.

As before, conversions to a ROTH IRA, a rollover between a qualified plan and an IRA, and direct trustee-to-trustee transfers are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

For more information or to discuss your specific situation, please do not hesitate to contact us. 

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