IRA Rollovers – New IRS Rules for 2015:
In 2014 the IRS rewrote the rules on rollovers between individual retirement accounts (IRAs). In November last year they clarified this and issued guidance as to how and when a new once-per-year limit on these would be applied.1
Whilst this was well reported in the US, both online and in publications such as the Wall Street Journal2, it is fair to say that it has received scant coverage in the UK and Europe. For US expats or those with a number of IRA accounts it now means they need to be careful how they go about consolidating such accounts.
When doing a rollover an IRA owner withdraws money from their traditional IRA or Roth IRA and then deposits the same dollar amount into the same type of IRA within 60 days. As of January 1st 2015 owners of IRAs can do only one 60-day rollover a year, for all their IRAs. The rule no longer applies separately to each IRA – it covers traditional and Roth IRAs as well as SEP and Simple IRAs. Moreover the one-year period is not a calendar year – it covers a rolling 12 month period. However, the IRS guidance makes clear that this only starts on January 1st 2015 and excludes any 60-day rollovers made in 2014. After this date if two 60-day rollovers take place within the one-year period the second distribution will be taxable and could be subject to early withdrawal penalties if applicable.
As the IRS note in their guidance this issue can be overcome by avoiding 60-day rollovers and instead doing what is known as a direct or “trustee-to-trustee” transfer whereby the funds move directly from one IRA to another at a different institution without the client themselves receiving the funds. Trustee-to trustee transfers are not subject to the one-per-year-limit. The IRS also clarified that cheques from one IRA custodian made payable to another IRA custodian qualify as trustee-to-trustee transfers – not a rollover – even if the first custodian sends the cheque to the IRA owner. For example, if Raymond James was the receiving institution a cheque made payable to “Raymond James Inc. FBO Mr X Client” would qualify. As the IRS themselves state:
“IRA trustees are encouraged to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.”
Furthermore conversions from traditional IRAs to Roth IRAS and rollovers from qualified plans such as 401(k) or 403(b) plans to IRA accounts are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.
If you have any questions about this please contact your MASECO adviser.