October 11, 2017 | Posted in:

Explaining IRA-to-IRA Rollover Limits

Alloy Silverstein’s Tax Tip of the Week

The tax rules are relatively lenient for rollovers to a traditional IRA. For instance, if you transfer funds from your 401(k) plan to an IRA within 60 days, there’s no tax liability on the transfer. Similarly, if you transfer funds from one IRA to another within the 60-day window — say, for investment reasons — you avoid tax for the current year.

In effect, this gives you 60 days to use the money as you see fit. It’s like getting an interest-free loan from the IRS, albeit for just two months. However, be aware of a special wrinkle.

Limited to once a year

The tax law also says that you’re limited to just one IRA-to-IRA rollover for the year. In a 2014 tax court case involving this once-a-year rule (Bobrow, TC Memo 2014-21), the limit was applied to all the IRAs owned by the taxpayer, not each one separately. This is different from the previous interpretation by many tax commentators and even the IRS itself.

The facts in this case can be confusing, but here’s all you need to know. The taxpayer argued that the one-year limit didn’t apply to another IRA he owned after he completed an IRA-to-IRA rollover. The tax court disallowed his rollovers within the next 12 months. Subsequently, the IRS decreed that it would follow the court’s ruling. If you’re in a similar position, be aware that you can’t use multiple rollovers within the same year.

What happens if you violate the once-a-year rule?

The transfer is treated as a taxable distribution, so you’ll be taxed at your regular tax rate on the portion representing deductible contributions and earnings. What’s more, you might face additional tax complications. For example, a 10 percent penalty generally applies to taxable IRA distributions made before age 59½.

Can you avoid the once-a-year rule?

“To avoid the once-a-year role, you may make a trustee-to-trustee transfer,” says Mike Engleman, CPA. “With a trustee-to-trustee transfer, you do not take possession of the investment at any time. There are no limits on how many trustee-to-trustee transfers you can complete in one year.”

The best approach is to avoid potential tax problems by strictly observing the IRA rollover rules. Give our South Jersey offices a call if you have questions specific to your situation.
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© MC 2017 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.


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