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Don’t get zapped by the new IRA rollover rule

December 29, 2014

By Paul Brucker

The saying goes “there are two things for sure – death and taxes.” You might add “tax changes” to that list. Effective January 1, 2015, you can only make one rollover per 365 days between your IRA accounts, regardless of how many IRAs you own. Otherwise, you may be socked with an early withdrawal penalty and taxes.* However, if you have multiple IRAs you want to combine, you can still make unlimited transfers between IRAs without any tax consequences. (Read on to understand the difference between a rollover and a transfer.)

For years, many clever taxpayers have used multiple IRA rollovers as interest-free loans. They took the money out of one IRA and used the funds without owing tax or penalties if they deposited the total withdrawal amount back into another IRA within 60 days.

Some people blame the new law on New York tax attorney Alvan Bobrow and his wife. This wealthy couple withdrew and rolled over hefty sums from several IRAs during a six month period. They assumed there would be no IRS trouble if they returned the money to an IRA within the 60-day deadline. Such money movement raised a red flag for the tax court and prompted the IRS to close this IRA loophole and change the rollover rule.

Before 2015, you could make one rollover per 365 days for each IRA you owned. Under the new law, no matter how many IRAs you have, you can only make a single tax-free rollover from one IRA to another in a 365-day period.

The differences between IRA transfers and IRA rollovers
You can still make transfers between IRAs without any tax consequences. With a transfer (also known as a trustee-to-trustee or custodial transfer), you authorize the financial institution where your IRA is held to send the funds directly to your new IRA. Transfers help you to avoid missing the 60-day deadline.

On the other hand, with a rollover, you have the check for the balance of the account made payable to you and you must deposit that amount within 60 days to the new IRA plan custodian – or face tax consequences.

There are some exceptions to the new rollover rule:

  • There is no limit on how many qualified retirement plans, such as 401(k) accounts, that you can roll over to IRAs
  • IRA conversions, in which you move assets from a Traditional IRA into a Roth IRA, are not subject to the new IRA rollover limit. However, IRA conversions do incur tax consequences
  • If you received a rollover check from an IRA during the final two months of 2014 and properly roll it over to another IRA (normally within 60 days), it will have no impact on your rollover limit for tax year 2015
     

The difference between an IRA transfer and an IRA rollover:

IRA transfer
(aka trustee-to-trustee transfer)     
IRA rollover    
Check payable to new IRA financial institution for the benefit of the IRA owner (you) Check payable to IRA owner (you) to deposit in new IRA
No tax consequences Tax consequences if check is not deposited into another IRA within 60 days
Unlimited annual transfers Limited to one rollover per 365 days