IRA rollovers are a popular way of obtaining a short-term tax-free loan from an IRA.
To receive tax-free treatment, the amount withdrawn from the IRA must be redeposited
into the same or another IRA no later than 60 days after the taxpayer received the
distribution (the 60-day requirement). In addition, the tax-free rollover privilege
is limited to one rollover within any one-year period. The one-year period starts on
the date the amount rolled over was received â€” not the date it was rolled over.
For years, the IRS has held that the one-year waiting period between IRAs applies
separately to each IRA. This taxpayer-friendly interpretation allowed taxpayers with
multiple IRA accounts to roll over two or more distributions during a 12-month
period, provided each was from a different account.
However, the IRS has adopted the Tax Courtâ€™s recent unfavorable interpretation of the
one-IRA-rollover-per-year rule, which considers all the taxpayerâ€™s IRAs together for
the limitation. To ease the pain, they have provided some transitional relief and
will not apply the new, stricter interpretation to any rollover involving a
distribution that occurs before January 1, 2015. So there is still a little time to
take advantage of the current, more liberal, rules.
Example: Transitional relief for the one-IRA-rollover-per-year rule.
Stella desperately needs cash, but only for a relatively short time. She wants to
temporarily use the funds held in her three traditional IRAs (IRA-1, IRA-2, and
IRA-3). In 2014, Stella takes $75,000 out of IRA-1. Fifty-nine days later (still in
2014), she withdraws $75,000 from IRA-2 and deposits that amount back into IRA-1.
Fifty-nine days after that (still in 2014), she withdraws $75,000 from IRA-3 and
deposits the amount back into IRA-2. Fifty-nine days after that, her cash crunch is
over, and Stella deposits $75,000 back into IRA-3.
Under the transitional rule, Stella is effectively able to borrow $75,000 from her
IRAs for almost half a year without any tax consequences via three tax-free rollover
transactions because all the IRA distributions rolled over were withdrawn before
January 1, 2015.
Variation: If Stella withdraws the $75,000 from IRA-3 in January of
2015, she will fall outside the transitional relief (because it only applies to
distributions occurring before January 1, 2015). Therefore, the distribution from
IRA-3 cannot be rolled over because she already used up her one-IRA-rollover-per-year
privilege with the earlier rollovers in 2014.
Please contact us to discuss this IRA law change and the beneficial aspects of IRAs
that have not changed.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014