New ruling on rollovers could impact your IRA clients

A recent decision by the United States Tax Court limits the number of IRA rollovers that an individual can do in a year. While the new ruling may cause confusion or concern for some clients, the limit does not apply to direct transfers.

IRA owners may move funds from one IRA to another either by direct trustee-to-trustee transfer or a 60-day rollover.

With direct transfer, funds are moved directly from the trustee of the existing account to the new account’s trustee. The account owner never receives the funds, and it is not reported to the IRS. With the rollover option, a client receives the distribution of the IRA proceeds and has to re-invest them in another IRA within a 60-day period or pay a penalty.

The Tax Court ruling changed the interpretation of an existing 12-month limit on 60-day rollovers within the tax code. The court ruled that IRAs will now be considered in aggregate, which, in effect, would preclude multiple rollovers within a 12-month period.

Prior to the ruling, account owners could perform more than one 60-day rollover if they had multiple IRAs held by different custodians or providers, without any penalty. The 12-month limit already existed in the previous code, but the IRS had interpreted it to apply to each IRA account separately. For example, an account owner with an IRA at company A and another at company B, could execute a 60-day rollover with each account during the 12-month period.

Now that IRAs will be considered in aggregate, if account owners perform one 60-day rollover in one account, they will have to wait another 12 months to use the same rollover method in another account.

There are no limits on the number of trustee-to-trustee transfers that can be executed.

The IRS has adopted the new Tax Court ruling, which takes effect beginning January 1, 2015.

Talking it over with clients
The ruling provides an opportunity to connect with clients who have several IRAs to let them know about the law and how it may affect their strategy. The majority of IRA owners generally use the trustee-to-trustee method. For those clients with multiple IRA accounts who may want to take possession of the distribution for the 60-day period, the new ruling may affect their strategy. Those planning 60-day rollovers will have to be cautious when dealing with multiple IRAs.


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