New IRS Rollover Rules for IRAs but not 401k
New IRS Rollover Rules
The once-per-year rollover rules have changed stemming from Internal Revenue Service (IRS) Announcement 2014-15 (listed below) which was released on March 20, 2014. The new rules don’t necessarily apply to rollovers from IRAs to 401k plans including solo 401k plans.
The following scenarios DO NOT COUNT towards the Once-Per-Year Rollover Rule
Trustee-to-Trustee IRA Transfers: This is the method the IRS prefers for moving money from one IRA to another IRA because the funds move directly from one IRA financial institution to another without the IRA account owner ever touching the funds and thus prevents the IRA account holder from personally using the funds. When funds are moved via a trustee-to-trustee transfers, neither the 60-day rollover rule nor the once per year rule apply. As a result, an unlimited number of direct transfers may be processed. Announcement 2014-15 affirms this by stating “These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.”
Plan-to-IRA Rollovers: Because the once-per-year rollover rule is an IRA-to-IRA and Roth IRA-to-Roth IRA rule, the once-per-year rollover rule does not apply to a rollover from a 401k including a solo 401k plan to an IRA.
IRA-to-Plan Rollovers: Similar to the plan-to-IRA exclusion discussed above, IRA-to-plan rollovers also don’t fall under the once-per-year rollover rule.
Roth IRA Conversions: If money or assets is converted from an IRA or qualified plan such as a solo 401k to a Roth IRA, either directly, or indirectly via a 60-day rollover, the conversion—which under the IRS regulations is deemed a rollover—does not fall under the rollover rules for purposes of the once-per year rule. The once-per year rule also does not apply to recharacterizations (i.e, when a Roth IRA conversion is changed back to a Traditional IRA).
401k-to 401k Transfers: When retirement money or assets are moved from one qualified plan (e.g., a 401k, PSP, MPP, TSP, 457b, 403b or DBP) to a 401k including a solo 401k, the check is made payable in the name of the solo 401k in the case of money; if assets, they are re-registered in the name of the solo 401k. As a result, it is deemed a trustee-to-trustee transfer; thus, the once-per-year rollover rule does not apply to a 401k-to-401k transfer.
Solo 401k In-Plan Roth Conversions: Because the once-per-year rollover rule only applies to IRAs, an in-plan Solo 401k Roth conversion is not affected by the new once-per-year rollover rule.
Below is the IRS announcement.
Application of One-Per-Year Limit on IRA Rollovers
This announcement addresses the application to Individual Retirement Accounts and Individual Retirement Annuities (collectively, “IRAs”) of the one-rollover-per-year limitation of § 408(d)(3)(B) of the Internal Revenue Code and provides transition relief for owners of IRAs.
Section 408(d)(3)(A)(i) provides generally that any amount distributed from an IRA will not be included in the gross income of the distributee to the extent the amount is paid into an IRA for the benefit of the distributee no later than 60 days after the distributee receives the distribution. Section 408(d)(3)(B) provides that an individual is permitted to make only one rollover described in the preceding sentence in any 1-year period. Proposed Regulation § 1.408-4(b)(4)(ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs), provide that this limitation is applied on an IRA-by-IRA basis. However, a recent Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21, held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period. The IRS anticipates that it will follow the interpretation of § 408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation. These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B). See Rev. Rul. 78-406, 1978-2 C.B. 157.
The IRS has received comments about the administrative challenges presented by the Bobrow interpretation of § 408(d)(3)(B). The IRS understands that adoption of the Tax Court’s interpretation of the statute will require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, which will take time to implement. Accordingly, the IRS will not apply the Bobrow interpretation of 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before January 1, 2015. Regardless of the ultimate resolution of the Bobrow case, the Treasury Department and the IRS expect to issue a proposed regulation under § 408 that would provide that the IRA rollover limitation applies on an aggregate basis. However, in no event would the regulation be effective before January 1, 2015.
The principal author of this announcement is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this announcement may be sent via e-mail to [email protected]
You may visit MySolo401k.Net to stay abreast of the IRA and Solo 401k regulations.