Today, in Announcement 2014-32 (the "Announcement"), the Internal Revenue Service clarified the rules that will apply going forward when an owner of an individual retirement arrangement (IRA) seeks to roll over a distribution when a prior rollover has been made within the preceding one-year period.
Executive Summary: Today, in Announcement 2014-32 (the "Announcement"), the Internal Revenue Service clarified the rules that will apply going forward when an owner of an individual retirement arrangement (IRA) seeks to roll over a distribution when a prior rollover has been made within the preceding one-year period.
In January of this year, the U.S. Tax Court decided Bobrow v. Commissioner, T.C. Memo. 2014-21 ("Bobrow"),in which it decided that the once-per-year limit on IRA rollovers that is imposed by the Internal Revenue Code (the "Code") prevents an individual from making more than one tax-free IRA-to-IRA rollover in any one-year period, even if the rollovers are made to or from (or to and from) different IRAs. Shortly after the Bobrow decision, the IRS issued Announcement 2014-15, 2014-16 I.R.B. 973, in order to address the way in which the Tax Court applied the one-rollover-per-year limitation of the Code. Announcement 2014-15 pointed out that Proposed Regulation §1.408-4(b)(4)(ii) as well as IRS Publication 590, Individual Retirement Arrangements (IRAs), provided that the once-per-year limitation was applied on an account-by-account basis, and only limited multiple rollovers involving the same IRAs. (That Proposed Regulation has since been withdrawn.) Since the Bobrow decision effectively created a new rule, the IRS said that it would not apply the Court's interpretation to transactions occurring before January 1, 2015. However, beginning in 2015, the once-per-year limitation would be applied by aggregating all of an individual's IRAs, effectively treating them as one IRA for this purpose.
In the new Announcement, the IRS reiterates that it will apply the Bobrow interpretation to IRA distributions that occur after 2014. However, it also states that a distribution from an IRA received by an individual during 2014 and properly rolled over to another IRA (in either 2014 or 2015) will not limit any subsequent 2015 distributions and rollovers involving other IRAs owned by the same individual. In other words, a 2014 distribution that is properly rolled over will be disregarded when determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is received from an IRA that neither made the 2014 distribution, nor received (or receives) the rollover of that distribution.
Although a post-2014 eligible IRA distribution that is properly rolled over by an individual to another IRA will still be tax-free – even if a pre-2015 IRA distribution had been rolled over within the preceding one-year period (as described above) – a subsequent distribution from any of the individual's IRAs (either traditional or Roth) that is received within a year after that distribution will not be eligible for rollover. In addition, a rollover between Roth IRAs will be applied to prevent a rollover between traditional IRAs within the succeeding one-year period, and vice versa. However, Roth conversions (even if effected via rollover from a traditional IRA to a Roth IRA), are disregarded for this purpose, as are trustee-to-trustee transfers.
If you have any questions regarding this Alert, or how the Announcement or the Bobrow decision affects you or your employees, please feel free to contact the author of this Alert, Jeffrey Ashendorf, at jashendorf@fordharrison.com, or any member of FordHarrison's Employee Benefits Practice Group. You may also contact the FordHarrison attorney with whom you usually work.