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IRA Rollover Rule Changes

IRA Rollover Rule Changes

The IRA is an excellent vehicle for retirement savings. However, a recent change in rules may impose some limitations over this savings tool. As per the new rules, Americans saving through an IRA account will be allowed to make only a single rollover from one IRA account into another over any 12 month period. This rule will come into force by January 1, 2015 and it will be applicable irrespective of the number of IRAs owned by the individual. The Internal Revenue Code 408 (d)(3)(B) section outlines this rule. Subsequently, the IRS intends to release the Publication 590 outlining this new regulation and its interpretation.

 

Rollover limitations in detail

 

Americans saving up for their retirement through these accounts still have several options open to them, though. To begin with, the  single rollover limitation does not apply on conversions from traditional to Roth IRAs. That means an individual can still make as many rollovers of this kind as he desires within any given 12 month period. Also, inter- IRA transfers from trustee to trustee do not attract these restrictions. This is because this kind of transaction is not technically considered a roll over.

 

In addition, this limitation has been interpreted as being applicable only on an IRA by IRA basis which means that if an individual owns several IRA accounts and he rolls over one of them into another,  the limitation applies on both those specific IRAs and not on the others held by him. This offers considerable flexibility to the individual to manage his IRAs as he sees fit.

 

The impact of the court decision

 

In the Bobrow vs. Commissioner case, the Tax court decided that non- taxable rollovers between two IRAs should not be permitted when the individual has already initiated a rollover from any IRA held by him in the 1 year period preceding the proposed rollover. In effect, the individual has to include untaxed sums that arise from IRAs in his gross income if an IRA to IRA rollover has been carried out by him over the past 12 months time.  This untaxed sum may attract a early withdrawal tax amounting to 10 percent.

 

It is also important for individuals to remember that moving these sums into another IRA may result in then being viewed as excess contributions and being taxed at six percent if they continue to remain in the IRA account.

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