Currently, owners of individual retirement accounts can do only one 60-day rollover a year, for all their IRAs. The rule no longer applies separately to each IRA. In this case, IRAs include traditional and Roth IRAs, as well as SEP and Simple IRAs.
The one-year period is not a calendar year; it is 365 days or 12 months. If a second 60-day rollover takes place within the one-year period, the distribution will be taxable and subject to a 10% early-withdrawal penalty if the client is under 59 1/2.
Should clients attempt a second rollover, the problem cannot be fixed. The IRS does not have the authority to help correct the situation. This could end an IRA, for example, if clients were moving their entire IRA balance to a new custodian or a new adviser.
It can get worse. If clients do a second 60-day rollover, it's now not only taxable, but an excess IRA contribution subject to a 6% penalty each year the ineligible rollover funds remain in the account.
As a review, there are two ways to move money from one IRA to another: direct transfer and indirect transfer. Always move IRA funds with a direct transfer if you can.
With a direct transfer, also called a trustee-to-trustee transfer, the funds move directly from one IRA to another without the client's touching the money. Direct transfers can be done as often as a client wishes, without having to worry about the once-a-year IRA rollover rule.
In addition, according to the IRS if the custodian of the individual retirement account makes a check payable to the receiving custodian rather than to the client personally, that check will qualify as a trustee-to-trustee transfer. Therefore, it will not be subject to the once-per-year rollover rule.
With the indirect transfer, also called a 60-day rollover, clients receive a check from their IRA made out to them personally. They have 60 days from the receipt date to redeposit those funds into another IRA, or even back to the same IRA.
IRA owners and advisers should avoid indirect, 60-day rollovers like the plague.
This issue surfaced as a result of a tax court case about a year ago. Prior to this case, the published tax rules (IRS Publication 590) allowed the once-per-year rule to be applied separately to each IRA.
However, in the case in question, the court held that the individual was taking advantage of the 60-day rule for each IRA. He had done a series of rollovers from separate IRAs and had use of his IRA funds for almost six months. The court essentially said, “No more of this nonsense.” The defendant lost his case, and that changed the interpretation of the once-per-year rule for everyone.
The court said that the rule applies to all IRAs, not to each one separately. The IRS agreed and changed the rules in March with IRS announcement 2014-15.
The rule also does not apply to rollovers from retirement plans such as 401(k)s or 403(b)s to IRAs or from IRAs back to plans. Rollovers from a traditional IRA to a Roth IRAs (otherwise known as a Roth conversion) are also exempt from the once-per-year rollover rule.