Effective January 1, 2015, owners of Individual Retirement Accounts (IRAs) will only be allowed one 60-day rollover every 12 months, regardless of how many IRAs they own. (To “rollover” means to move assets from one retirement account to another.) So, for example, if a distribution is taken from a Traditional IRA on January 31st of next year, in order to avoid income tax on the distribution, it must be rolled over to another IRA within 60 days. Then, in that case, the owner would not be eligible to do another rollover until January 31, 2016.
Until the new rules take effect, any rollovers that are carried out will be grandfathered in under the current law, which allows for one rollover every year for each of their IRAs.
Under the new regulations, should an owner take another distribution from their IRA before the 12 months is up, it will have to be reported as income and taxed. Furthermore, owners under 59 ½ years old may be subject to a 10% early withdrawal penalty. If the owner then tries to return the money to an IRA, the IRS will treat it as an excess contribution and impose a 6% tax on the assets for as long as they remain in the IRA.
There are various kinds of rollovers, therefore exceptions to the rule. According to the IRS, the once-per-year rollover limit doesn’t apply to:
* Roth conversions from traditional IRAs
* Trustee-to-trustee transfers between IRAs
* IRA-to-retirement plan rollovers
* Retirement plan-to-IRA rollovers
* Plan-to-plan rollovers
What Does This Mean for Me?
In a nutshell, rollovers that go directly from one retirement account to another, without passing through your hands, do not count against your annual allotment of 1 rollover per year. However, any checks or wires that are made out to you personally (and not the trustee of your retirement account) will be subject to the 12-month rollover limit.
While most investors will not be seriously affected by the upcoming amendment, it is a reminder that the tax code is always changing. Your advisors should be fully aware of any tax code changes and assist in making changes or implementing other strategies if needed.