New IRA Rollover Rules to Take Effect in 2015

A recent Tax Court decision will require the IRS to change its taxpayer-friendly interpretation of the rules that govern IRA rollovers.

If you withdraw funds from an IRA and roll them over into the same or a different IRA within 60 days of receipt the withdrawn funds will not be taxed. However, you can only take advantage of this rule once every 12 months. The application of the 12 month waiting period rule was the issue at hand in the recent Tax Court case.

The IRS has interpreted the 12 month waiting period to apply on an IRA by IRA basis. For example, if you have 2 IRAs, and you rolled over funds from IRA #1 into new IRA #3, and within 12 months of this rollover you also wanted to rollover funds from existing IRA #2 into new IRA #4, the IRS took the position that this was permissible even though two rollovers occurred within the same 12 month period because they involved rollovers from different IRAs—i.e., you apply the 12 month waiting period on an IRA by IRA basis. As a result, although you could not do a second rollover from IRA #1 within 12 months of the first rollover from IRA #1, you could do a rollover from a different IRA within that 12 month period.

The Tax Court disagreed with the IRS application of the waiting period rule on an IRA by IRA basis. The Tax Court held that the 12 month waiting period should be applied on an aggregate basis to all IRAs involved. As a result, in the example above the taxpayer would be prohibited from rolling over funds from IRA #2 to IRA #4 on a nontaxable basis since the rollover occurred within the 12 month period following the rollover from IRA #1. If the taxpayer nevertheless went ahead with the rollover from IRA #2 within the 12 month waiting period, the rollover would be taxable and also might be subject to the 10% early withdrawal penalty.

The IRS has announced that it will allow taxpayers to continue to make rollovers under the old rules through the end of 2014 and will not apply the new aggregate approach until 2015. Note that the 12 month waiting period rule does not and will continue not to apply to trustee-to-trustee transfers between traditional IRAs or between Roth IRAs. Finally, rollovers from employer retirement plans to IRAs and conversions of regular IRAs to Roth IRAs will continue to be exempt from the 12 month waiting period rule. Duck


About Andy O'Donnell

Andy is a partner of the firm, practicing in the areas of tax law and estate and business planning. He is the former chair of the Trusts and Estates Group, and he currently serves as a member of the Management Committee.
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