Investors who typically use a rollover strategy for multiple individual retirement accounts (IRAs) will need to reconsider because of a rule change that took effect this year.
A decision by the United States Tax Court that limits the number of IRA rollovers an individual can perform in a year was implemented in January 2015.
IRA owners may move funds from one IRA to another either by direct trustee-to-trustee transfer or by using a 60-day rollover strategy. With direct transfer, the funds are moved from the trustee of one account to the trustee of the new account. The account owner never receives the cash, and it is not reported to the IRS as a distribution.
With the rollover option, investors have access to the cash for a 60-day period. The investor may use the money for an investment or other personal reason without incurring a tax or penalty provided they reinvest the amount into another IRA within a 60-day period.
IRS regulations limit the number of 60-day rollovers to one in a rolling 12-month period. But the court’s interpretation requires that all IRAs are considered in aggregate.
Prior to the ruling, the IRS had interpreted the 60-day rollover provision to apply to each IRA account separately.
No limits exist on the number of trustee-to-trustee transfers that can be completed.
This rule does not apply to the conversion of a traditional IRA to a Roth IRA.
The IRS adopted the one-rollover-per-year rule last year. In its announcement, the IRS noted the tax consequences of exceeding the rollover limit, including liabilities for early withdrawal and for an excess contribution to an IRA account.
IRAs comprise a large segment of the U.S. retirement market — with $7.3 trillion representing 30% of retirement market assets, the Investment Company Institute reported. About one third of U.S. households owned IRAs in 2014.
While it’s important for investors to be reminded of the limits, the conversation with an advisor also creates an opportunity to review accounts, especially with those who have multiple IRAs, and explore how this may change their overall investment strategy.