Doing a Rollover? Make Sure You Know the New Rules!

February 20, 2015

A 'rollover,' in tax terms, is the tax-free transferal of assets from one tax-favored retirement account to another similar account. For example, you may execute a rollover of an old employers' 401(k) plan to a traditional IRA, a SEP plan to a traditional IRA, or a traditional IRA to another traditional IRA.

First, in past years, taxpayers could roll any IRA account or eligible 401(k) account over to another traditional IRA once per year. However, a recent tax court ruling (Bobrow v. Commissioner) clarified the rules and force the IRS to impose a more restrictive interpretation. Instead of the rule limiting rollovers to once per year per account, the new interpretation limits rollovers other than direct trustee-to-trustee transfersto once per year per taxpayer.

Don't worry: If you have made multiple IRA rollovers within a given year in the past, the IRS is not planning on going back and disallowing your IRA rollovers and slapping you with taxes and penalties.

Instead, the IRS has issued an interim policy delaying any enforcement of the more stringent provision until tax year 2015.

Note also that this restriction only limits the number of so-called 60-day rollovers you can take during the year. It's only a 60-day rollover if you take possession of the funds yourself before transferring them to a new IRA account. Some individuals were using the accounts as a source of short-term credit, taking the money out of their IRAs and using the money for their own purposes for 60 days before putting the money into another IRA.

If you fail to transfer the money within 60 days, the IRS will deem you to have taken a distribution of the entire amount, and you will then owe income tax on the amount you failed to transfer. You would still receive credit for taxes you paid on nondeductible IRA contributions. Speak to your tax advisor for specific information on how this may apply to you.

If you are under age 59½, you may subject to an additional 10 percent excise tax, unless you qualify for a hardship exemption. However, these hardship exemptions only exist for IRAs. 401(k) plans do not generally make the same allowances for hardship exemptions under federal law.

If you don't take possession of the funds yourself, however, but instead have the old custodian transfer the funds directly into the hands of the new custodian, you don't have to worry about the once-per-year rule.

Because of the possibility of blowing the 60-day window, or unintentionally running afoul of the 'once-a-year' rule, it's usually best to do a direct trustee-to-trustee transfer, where possible.

Note: You still cannot rollover an IRA account from which you have taken a distribution in the past year, or into which you rolled money from another IRA within the past year. These rules have not changed.

Note: Remember that you don't roll over a traditional IRA or tax-deferred employer plan directly into a Roth IRA. Instead you would execute a "conversion," paying taxes on any traditional IRA money you want to convert to a Roth on which you took a tax deduction.

For more information, contact your Financial Planning Advisor.

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