The IRS has changed its position on the one-per-12-month individual retirement account (IRA) rollover rule.
Starting in 2015, it’s “one and done”—the IRS limits people to one rollover in a 12-month span, no matter how many IRA accounts they own. They may continue to make unlimited trustee-to-trustee IRA transfers, a valuable alternative discussed later in this article.
This change comes on the heels of a U.S. Tax Court ruling last year in Bobrow v. Commissioner limiting individuals to one IRA rollover per 12-month period.
This ruling sent up red flags in the industry because it conflicted with the longstanding IRS position on the rollover rule. The IRS had, for more than 30 years, based its position on a proposed Treasury regulation (Prop. Treas. Reg. 1.408-4(b)(4)(ii)—yes, a regulation that remained in the proposed stage for more than three decades— that generally permitted a taxpayer to roll over each IRA he or she owned once per 12-month period.
The IRS provided detailed examples supporting this interpretation in Publication 590, “Individual Retirement Arrangements,” a reliable resource for taxpayers and tax advisers for years.
But last spring, the IRS released Announcement 2014-15, indicating it will apply the Tax Court’s interpretation of the rollover rule to all IRA distributions taken on or after Jan. 1, 2015.
This is a significant change. Surprisingly, the IRS won’t require IRA trustees and custodians to amend their existing IRA plan agreements and disclosure statements to conform to the new IRS interpretation.
But many forms providers recommend that IRA trustees and custodians update their account opening documents, because IRS regulations require that an IRA owner receive an up-to-date disclosure statement when opening an account.
Ultimately, it’s the IRA owner’s responsibility—not the IRA trustee’s or custodian’s— to comply with the one-per-12-month rollover rule. So, some IRA trustees and custodians question whether they must take any action.
Is it necessary to inform existing IRA owners of the rule change? Is there value in amending existing IRAs and Coverdell Education Savings Accounts (ESAs) so account owners have up-to-date documents? If the IRA owner is responsible for complying with the one-per-12- month rollover rule, should the IRA trustee or custodian care about it?
The answer to these questions is yes. As an IRA trustee or custodian, you should be concerned with the rule change and its impact on your IRA owners for a number of reasons:
And the tax consequences could be costly. Consider the case of a 62-year-old IRA owner who has traditional IRAs at three financial organizations, with a balance of $70,000 in each account. The IRA owner wants to consolidate the three IRAs into a new IRA at your credit union.
Prior to 2015, the IRA owner could take a distribution from each IRA, then roll over the assets into an IRA at your credit union within 60 days of the date of distribution—so long as none of the IRA accounts had been rolled over in the previous 12-month period.
Now, only one of the three distributions will be eligible for rollover, and the IRA owner must treat the other two distributions as taxable income. Even in the lower tax brackets, adding $140,000 to taxable income results in a substantial tax bill.
Unanswered questions remain
As with any major regulatory change, many questions remain unanswered.
In July 2014, the IRS withdrew Prop. Treas. Reg. 1.408-4(b)(4) (ii) and stated it intends to issue proposed regulations to reflect its new IRA rollover rule interpretation.
In November 2014, the IRS issued Announcement 2014-32 with a few clarifications. IRA distributions made at the end of 2014 in which the 60-day rollover period extends into 2015 won’t be subject to the “Bobrow” interpretation.
And a rollover from a traditional IRA into a Roth IRA—also known as a “conversion”—isn’t subject to the one-rollover-per-year limitation. The IRS will update Publication 590 to reflect the new interpretation.
To keep your credit union’s IRA program in compliance with the new rollover rule, follow these four steps:
The November IRS announcement ended with some good, basic advice: “IRA trustees are encouraged to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA.
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.”
Amending your existing IRA agreements and informing your IRA owners of the rollover rule change can help members avoid negative tax consequences and prevent unpleasant member relations issues for your credit union.
DENNIS ZUEHLKE is compliance manager for Ascensus, a retirement and college savings service provider. Contact him at 608-229-1875.