On January 1, 2015, the Internal Revenue Service began to look at 60-day rollovers in a new light. It’s important for you and your financial adviser to understand the new interpretation of the ruling. The new rule is not quite as forgiving as what it once was; therefore, one mistake could lead to considerable tax consequences.
Previously, IRC Section 408(d)(3) allowed for distributions to be made from IRA accounts, without being taxed as ordinary income, as long as the funds were rolled back into an IRA providing it was done within 60 days. It applied to each IRA individually. The ruling made it moderately simple so when funds are withdrawn from a traditional IRA or Roth IRA and re-deposited within the time frame into the same type of IRA, it was not considered a taxable event. Individuals could even use this in their favor to make short-term personal loans to themselves – again, as long as it was repaid within the 60-day window. However, as in the case of Bobrow v. Commissioner, this is what would ultimately lead to the newly revised interpretation of the once-per-year limit.
The new ruling aggregates all IRA and Roth IRA accounts rather than viewing each account as its own entity, as was done previously. Therefore, in a 365-day period only one 60-day rollover can be completed, without tax implications, regardless of how many accounts one may have. However, there are certain rollovers and events that will not trigger the one-year waiting period. These include:
- Direct trustee-to-trustee transfers
- Rollovers to or from a qualified plan
- Roth conversions
Simply stated, when transferring funds from one individual retirement account to another, use the direct trustee-to-trustee method to avoid any confusion or triggering the one-year waiting period. However, if withdrawing funds as means of a “personal loan” with the intent to repay within the 60-day window or completing a transfer on your own, consult your financial adviser to ensure all the I’s are dotted and T’s are crossed.