Advisers are still not up to speed on the new, more strict interpretation of the once-per-year IRA rollover rule. It's been in effect since Jan. 1, yet advisers are still asking questions about it. Even worse, about 30% of advisers we have polled at adviser programs are unware of the new rule.
Violating this rule has severe consequences that can lead to the loss of a client's IRA, or worse, lawsuits. At a recent seminar, an adviser asked if it was OK to accept two rollover checks (from two different IRAs) where the checks were made out to the client, personally. This is NOT OK, but the adviser had already done it. The client will owe taxes on the second attempted rollover and could potentially owe the 6% excess contribution penalty as well. Unfortunately, this is a fatal error and cannot be corrected.
Since the beginning of 2015, an individual can only do one 60-day IRA rollover in a 12-month period, per IRS Announcement 2014-32 (issued Nov. 10, 2014). The rule now applies to
all of a client's IRAs in aggregate, rather than to each IRA separately (which had been the IRS position for many years). To be clear, this means that between all IRAs, SEP IRAs, SIMPLE IRAs and Roth IRAs,
only one rollover can occur every 12 months, NOT one rollover for each account or type of account.
ENCOURAGE DIRECT TRANSFERS
Unlike a rollover in which individuals personally receive a distribution from their IRA, direct (trustee-to-trustee) transfers between IRAs are not considered distributions and thus are NOT subject to the once-per-year limit. The IRS specifically reiterated this point in Announcement 2014-15, as well as in the new Publication 590-A.
To be safe, always encourage clients to move IRA funds via direct transfers, even if it means waiting a little longer for the funds to be moved.
The IRS also said that if the IRA owner receives a check
made payable to the receiving IRA custodian, that check is treated as a direct transfer since the IRA owner doesn't have use of the money.
Here are answers to common adviser questions on the new IRA rollover rule:
Question: I just discovered that one of my clients violated the once-per-year rule. Is there anything I can do to fix it, such as applying for an IRS waiver?
Answer: No. The IRS has no authority to allow exceptions to the rule, as they can for some late 60-day rollover situations. As a result, the subsequent rollover is not treated as a tax-free rollover, but instead, a taxable distribution. To make matters worse, the rollover is also treated as a regular IRA contribution, which often creates an excess IRA contribution in the receiving IRA, subject to a 6% penalty each year until it is corrected.
Question: Are there any exceptions to the once-per-year rule?
Answer: Yes. The exceptions are; Roth conversions done as a 60-day rollover from an IRA to a Roth IRA; IRA rollovers to and from company retirement plans such as 401(k)s; IRA first-time home buyer distributions when the home purchase is delayed or cancelled; qualified reservist distributions that are timely repaid; and IRA-to-IRA or Roth IRA-to-Roth IRA direct transfers.
Question: Does the once-per-year rollover rule apply to SIMPLE and SEP IRA distributions, or do they fall under the exception for rollovers to/from company plans?
Answer: Even though SEP IRAs and SIMPLE IRAs must be established by an employer, for purposes of applying the once-per-year rollover rule, SEP IRAs and SIMPLE IRAs are treated as IRAs, and are therefore subject to the once-per-year rule. If a client has traditional IRAs, SEP IRAs and SIMPLE IRAs, then they can only rollover one distribution from all of these accounts, combined, during a 365-day period.
Question: Does the new rule also apply to Roth IRAs?
Answer: Yes. It applies to all IRA-to-IRA rollovers and Roth IRA-to-Roth IRA rollovers.
Question: Is the 60-day rule still in effect?
Answer: Absolutely. Besides the once-per-year rule, an individual must still complete a rollover within 60 days after he receives the IRA distribution.
Question: My client has two IRAs at two different custodians that she inherited from her deceased husband as his only beneficiary. Can she roll them both over to an IRA in her own name (spousal rollover)?
Answer: The IRS has not directly addressed this issue, but to be safe, she should not move the funds using 60-day rollovers because it likely will be considered two rollovers within 365 days. Instead, she could do one as a 60-day rollover and the other as a transfer, or better yet, directly transfer them both to an IRA in her own name.
Question: If a prospect did an IRA-to-IRA rollover in January 2015, when can he move his IRA funds to me?
Answer: Immediately. Simply have him directly transfer the funds to his IRA with you. There are no limits on the number of direct transfers that can be made.
Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at irahelp.com.
