The One-Per-12-Month Rollover Rule in Review
by Robert Shipp, QKA
As we enter 2019, we are reminded that the only constant is change, especially when it comes to the retirement savings industry. With that in mind, let’s review a major change to an IRA rollover rule from a few years back that still trips up some people: the one-per-12-month rollover rule. Understanding the (relatively) new interpretation of the rule will help you better explain it to those clients who are considering a rollover and help ensure that they do not put their IRA savings in jeopardy.
In 2014, the IRS changed its long-standing position on the one-per-12-month rule for rollovers between IRAs in light of a United States Tax Court ruling in Bobrow v. Commissioner. Before the Tax Court’s ruling, the IRS had interpreted Internal Revenue Code Section (IRC Sec.) 408(d)(3)(B) to mean that each taxpayer was allowed one rollover per 12 months for each separate IRA owned by the taxpayer. Following the Bobrow decision, however, the IRS changed its interpretation of IRC Sec. 408(d)(3)(B), now reading it to mean that each taxpayer—not each IRA—is entitled to one rollover per 12-month period.
The New Normal
Since the Bobrow decision, the IRS has released additional guidance, clarifying that
SIMPLE IRAs, Traditional IRAs (including SEPs), and Roth IRAs are aggregated for purposes of the one-per-12-month limitation;
Roth IRA conversions do not count toward the limitation;
IRA-to-IRA transfers do not count toward the limitation; and
rollovers to or from eligible employer-sponsored retirement plans do not count toward the limitation.
It should be noted that the one-per-12-month limitation also applies to health savings accounts (HSAs) and Coverdell education savings accounts (ESAs), but these accounts are not aggregated with one another or with IRAs when considering the limit.
The following examples illustrate the consequences of the IRS’ updated interpretation.
Henry takes a distribution from his Traditional IRA on June 6, 2018. He rolls over this amount to another Traditional IRA within the 60-day time period allowed. Henry also requests a distribution from his Roth IRA, looking to roll over that amount to another Roth IRA. Henry may not complete this second rollover until June 6, 2019 (i.e., one year after the distribution date of the first rollover).
Martha owns a SIMPLE IRA, and a Roth IRA. Martha’s employer establishes a 401(k) plan, and Martha requests a rollover of her SIMPLE IRA balance to the plan on September 29, 2018. She later requests a rollover from her existing Roth IRA to another Roth IRA on November 15, 2018. Although she is requesting a second rollover within the 12-month timeframe starting with the date of the first distribution from the SIMPLE IRA, she does not violate the one-per-12 month rollover rule because the first rollover was to an employer-sponsored retirement plan.
Aaron owns an HSA and a Traditional IRA. He requests a distribution from his Traditional IRA on August 15, 2018, that he later rolls over to another Traditional IRA. Aaron also distributes and rolls over an amount from his HSA to another HSA on August 28, 2018. Aaron has not violated the one-per-12-month rollover rule because IRA and HSA rollovers are not aggregated for purposes of the limit.
With savvy savers seeking a leg up on retirement costs and taxation by establishing many types of tax-deferred savings accounts, it’s not always easy to see the boundaries—especially given the amount of change these accounts undergo. But by understanding how the rule has changed and keeping this limitation in mind when your clients request rollovers, you will be better able to help them stay within the boundaries set by the IRS.