One Per Year Limitation For Tax-Free IRA Rollovers

The Internal Revenue Code allows individuals who receive a distribution from an Individual Retirement Account (IRA) to avoid tax consequences by depositing the funds into another IRA within 60 days. Under the code, any amount distributed from an IRA will not be taxable to the account holder to the extent that the amount distributed is paid into another IRA for the benefit of the account holder no later than 60 days after the distribution from the first IRA is made. This prior interpretation applied this limit on an account by account basis and permitted a person with multiple IRAs to make one 60 day rollover from each IRA in any given year.

However, a recent court case, Bobrow v. Commissioner, has caused the Tax Court to change their interpretation of the one per year rule for IRAs. The Tax Court held that the limitation applies on an aggregate basis, meaning an individual will be able to complete one tax-free rollover per year from one IRA account (Section 408 (d) (3) (B). The second IRA rollover will be taxable even if the funds are distributed from a different account. This change, however, will not affect the ability to transfer funds tax-free from one IRA trustee directly to another, because such transfer is not considered to be a rollover, and therefore is not subject to the one rollover per year limitation. The change will be in effect beginning January 1, 2015.

This change from the IRS will significantly impact the flexibility of rollovers many IRA owners have enjoyed. The new application of the rules will also require more planning and consultation with an advisor when considering whether to make a non-required distribution from an IRA.

Should you have any questions, please contact a Hertzbach advisor today.