IRS Changes the Rules for Rollovers

Julia Chang
Posted

The U.S. Tax Court has thrown everyone—even the IRS—a curveball.

A judge recently ruled that a long-standing interpretation of the rules regarding IRA rollovers is, well, just plain wrong. Currently, you’re allowed to make one tax-free IRA rollover a year for each IRA you own.

That means you can take a distribution from an IRA tax- and penalty-free as long as you redeposit that amount back into the original account or roll it over to a different IRA within 60 days. Got three IRAs? Then, in theory, you could do this three times.

Now, a judge has ruled that the annual rollover rule applies to one IRA, and one only.

While the ruling itself is significant (and will, in fact, require the IRS to revise its Publication 590), it may not affect as many taxpayers as you’d think. That’s because the majority of Americans don’t have multiple IRA accounts, or even that much in retirement savings to speak of—in fact, 36% of workers say they have less than $1,000 saved. “There may be some high net-worth individuals who are worried, but this doesn’t impact the typical person at all,” Daniel Morris, a senior partner at accounting firm Morris and D’Angelo in San Jose, Calif., told USA Today.

Experts believe the tax court ruling wasn’t as much about being a stickler for the rules as it was about trying to limit folks from taking a 60-day “tax-free loan” from their accounts, which is not the original intent of the IRA.

According to one tax expert writing on MarketWatch, one way to move your retirement money around without violating the new rollover rules is to set up direct trustee-to-trustee transfers—for example, splitting up funds in one of your IRAs and distributing them into two or three IRAs that name your children as beneficiaries. Also, you can rollover a distribution from a 401(k) into an IRA, and that won’t count against your one-rollover-per-year limit.

But taxpayers still have time to figure out what this all means for them. The IRS says it won’t enact the tax court’s interpretation until January 1, 2015, at the earliest to give Americans time to adjust to the new rules.