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Through the end of 2014, individuals with more than one individual retirement account (IRA) could take a distribution from an account and, so long as the funds were either rolled back into the same account or moved to another IRA within 60 days, they could be fairly confident that the transaction wouldn’t be taxed. What’s more, they typically could do a distribution-and-rollover from each of their IRAs, with none being taxed.

That’s no longer the case. With a few exceptions, the IRS has limited IRA rollovers to one in each 12-month period, across all of an individual’s SEP, SIMPLE, traditional and Roth IRA accounts. This new rule went into effect on Jan. 1, 2015.

The tax court weighs in

This shift is a result of a 2014 U.S. Tax Court case, Bobrow v. Commissioner. At issue was the petitioners’ claim that their IRA distributions were nontaxable because they were repaid within 60 days. The IRS disputed the repayment schedule, as well as the assertion that the once-per-year limit on rollovers should apply to each IRA. In its opinion, which generally sided with the IRS, the court stated, “By its terms, the one-year limitation laid out in Section 408(d)(3)(B) [of the IRS Code] is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer.”

That’s a change in the interpretation of the regulations governing IRA distributions. Until this case, it was commonly held by the IRS that the limit on nontaxable rollovers applied on an IRA-by-IRA basis, and not across an individual’s portfolio of IRAs.

The possibility of abuses

The 60-day time frame for rollovers was intended to allow IRA owners time to move funds from one account or financial institution to another without worrying about taxes. However, the law limited the number of times that rollovers could occur in order to curb potential abuses. Absent any restrictions, an individual with numerous IRAs could create an ongoing chain of distributions and rollovers, essentially giving him- or herself tax-free loans.

Some exceptions remain

A few exceptions to the new rule remain. Trustee-to-trustee transfers, in which funds move from custodian to custodian and never are in the possession of the actual IRA owner, aren’t limited. Conversions from traditional IRAs to Roth IRAs also remain unlimited. But, rollovers between Roth IRAs are limited. Also, typically exempt from the new rule are rollovers between qualified plans, such as 401(k) plans, and IRAs.

In addition, to allow time to adjust to the new rule, the IRS said it would ignore some 2014 distributions. IRA distributions rolled to another or the same IRA in 2014 within 60 days won’t prevent 2015 distributions, so long as the 2015 distributions are from IRAs not involved in the 2014 transactions. This rule applies only to 2014 distributions.

However, as of Jan. 1, 2015, any distributions that don’t fit into the exceptions allowed, and that follow an IRA-to-IRA rollover made within the preceding 12 months, must be included in the account owners’ gross income. Not only that, but the amounts could be subject to a 10% early withdrawal penalty. And if the funds are rolled into another IRA, they could be treated as an “excess contribution” and taxed at 6% annually for as long as they remain in the IRA.

The bottom line

To avoid inadvertently violating the new rollover limits, it makes sense to do trustee-to-trustee transfers, if possible, when moving funds from one IRA account to another. Also, make sure you work with your tax professional. He or she can provide vital information on this new rule.