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New Rule on IRA Rollovers

Many taxpayers, at one time or another, need to transfer funds from one IRA to another IRA and generally have 60 days to do so. Taxpayers are limited to only one IRA rollover for any 12-month period (NOTE: this 12-month rule does not apply to direct, trustee-to-trustee transfers). Previously, the interpretation by the IRS was that this rule was applied on an IRA-by-IRA basis. In other words, a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual.

Effective January 1, 2015, as a result of a recent Tax Court decision [see Bobrow vs. Commissioner, TC Memo 2014-21], taxpayers cannot make a nontaxable rollover from one IRA to another if they have already made a rollover from any of their IRAs in the preceding one-year period.

If this new rule is violated, a taxpayer will have to include the second IRA distribution in income and may have to pay an additional 10% penalty for early withdrawal if under 59 ½. In addition, the “failed” rollover amount would be considered an “excess IRA contribution” and be subject to 6% excise tax penalty so long as this excess contribution remains in the IRA.

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