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IRS Clarifies Application of One-Per-Year Limit on IRA Rollovers - Provides Transition Rule. (Parker Tax Publishing November 30, 2014)

The IRS has issued guidance clarifying the application of the one-per-year limit on tax-free rollovers between IRAs and provided a transition rule. Announcement 2014-32 (11/10/14)

Background

Generally, under Code Sec. 408(d)(3)(A)(i), an amount distributed from an IRA is not included in the recipient's gross income to the extent the amount is rolled over into an IRA for the recipient's benefit within 60 days after the recipient receives the distribution. This is generally referred to as a "60-day rollover." Code Sec. 408(d)(3)(B) provides that an individual may make only one nontaxable 60-day rollover between IRAs in any one-year period.

Previously, proposed regulations and IRS Publication 590, Individual Retirement Arrangements (IRAs), provided that the one-rollover-per-year limitation applied on an IRA-by-IRA basis. However, the Tax Court in Bobrow v. Comm'r, T.C. Memo. 2014-21, held that the limitation applies on an aggregate basis, meaning that an individual cannot make more than one nontaxable 60-day rollover within each one-year period even if the rollovers involved different IRAs. In Announcement 2014-15, the IRS indicated that it anticipated following the Bobrow interpretation of Code Sec. 408(d)(3)(B), and accordingly that it would withdraw the proposed regulations and revise Publication 590 to follow that interpretation; however, the IRS also stated that it would not apply the Bobrow interpretation before 2015. The IRS withdrew the proposed regulations on July 11, 2014.

One-Per-Year Limit Clarified

The IRS has now issued Announcement 2014-32 to address certain concerns that have arisen since the release of Announcement 2014-15. According to Announcement 2014-32, the IRS will apply the Bobrow interpretation of Code Sec. 408(d)(3)(B) for distributions that occur on or after January 1, 2015.

This means that an individual who receives an IRA distribution on or after January 1, 2015, cannot roll over any portion of that distribution into an IRA if he or she has received a distribution from any IRA in the preceding one-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded in determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. In other words, a distribution from an IRA received during 2014 and properly rolled over (normally within 60 days) to another IRA, will have no impact on any distributions and rollovers during 2015 involving any other IRAs owned by the same individual.

The transition rule will give IRA owners a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs. The Bobrow aggregation rule, which takes into account all distributions and rollovers among an individual's IRAs, will apply to distributions from different IRAs only if each of the distributions occurs after 2014.

Exceptions to One-Per-Year Limit

A rollover from a traditional IRA to a Roth IRA (a Roth IRA conversion) is not subject to the one-rollover-per-year limitation, and such a rollover is disregarded in applying the one-rollover-per-year limitation to other rollovers. However, a rollover between an individual's Roth IRAs would preclude a separate rollover within the one-year period between the individual's traditional IRAs, and vice versa. For these purposes, the term "traditional IRA" includes a Code Sec. 408(k) simplified employee pension (SEP) and a Code Sec. 408(p) SIMPLE IRA.

The one-rollover-per-year limitation also does not apply to a rollover to or from a qualified plan, and such a rollover is disregarded in applying the one-rollover-per-year limitation to other rollovers. Nor does the limitation apply to trustee-to-trustee transfers.

Practice Tip: IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.

For a discussion of the rules for rollovers of distributions from IRAs, see Parker Tax ¶134,540. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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