Individuals have traditionally enjoyed flexibility in moving their retirement savings from one type of retirement plan to another type of plan, but rules are changing.
A rollover is a transfer of a distribution received from an IRA or other retirement plan by an individual to another IRA or type of retirement plan owned by the same individual. A rollover has important tax considerations. The amount distributed is not included in an individual’s income if the distribution is transferred to an eligible arrangement within 60 days after it is received. In certain cases, the 60-day period can even be extended by the IRS.
In a recently related tax court case, a married couple received distributions from more than one IRA in 2008. The couple claimed that they could make more than one tax-free rollover. The Tax Court disagreed.
The court found that the related tax code limits the frequency with which a taxpayer may make a nontaxable rollover contribution. The one-year limitation is not specific to any single IRA a taxpayer has but instead applies to all of the taxpayer’s IRAs. The IRS intends to amend the existing rules and revise the related tax publication to clarify that it will adopt the court’s decision.
A rollover must be distinguished from a trustee-to-trustee transfer. The Tax Court explained in its opinion that individuals who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering the one-year limit. Transferring funds directly between trustees, the court found, does not result in a distribution within the meaning of the tax code. Since the funds are not within the direct control and use of the participant, they are not considered to be rollovers.
As a relief measure, the IRS will not apply the Tax Court’s decision to any rollover that involves an IRA distribution occurring before January 1, 2015. However, the court’s decision and the IRS’s action may impact your retirement planning.
If you have any questions about IRA rollovers and how to plan for them, please contact our office at (417) 881-0145.