Tip of the Week: General Rollover Rules for IRAs and SEPs

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

Direct rollovers are not required for eligible rollover distributions from an IRA because there is no mandatory federal income tax withholding applicable to distributions from IRAs.

Accordingly, many IRA rollovers are done indirectly. It is important to remember that indirect rollovers are limited to only one per 12-month period applicable to all IRA accounts held by the account owner. This includes all traditional IRAs, Roth IRAs, SEPs and SIMPLE-IRAs. Common practice based on prior guidance contained in the IRS Publication 590, had been that the “once per 12-month period rule” was applied to each individual IRA – not all IRAs held by an account holder. However, in Borow v. Commissions, T.C. Memo 2014-21, a Tax Court issued an opinion that the rule would be applied in the aggregate. The IRS posted Announcement 2014-15 explaining the Tax Court rule would be followed, effective for IRA indirect rollovers occurring on and after Jan. 1, 2015. Of course, it is still permissible to move an IRA account directly from one trustee to another (referred to as a “trustee-to-trustee transfer”) without concern about the “once per 12-month period” rule.

Only deductible IRA values can be rolled into workplace plans; after-tax amounts can be rolled only to another IRA.

An indirect rollover must be completed by the participant account owner within 60 days of receipt of the distribution from the IRA in order to avoid taxes and the potential premature distribution penalty tax.

Any distribution from an IRA (including a SEP) is eligible for rollover except:

• A distribution containing a required minimum distribution.
• Distributions which are paid over a period of 10 years or more including life expectancy or lifetime income options.
• Distributions paid to a non-spousal beneficiary after death of the participant. Note, however, that the account could be moved as an inherited IRA (for example, after being renamed to “Mary Jones, beneficiary of John Jones, deceased”) through a direct transfer from one IRA trustee to another.