Toughened one-year wait period between IRA rollovers
You should know about an important change in the rules for IRA rollovers, which are transactions that let you withdraw cash from one IRA and redeposit it in another IRA without paying a current tax.
Rollovers are a popular way of moving IRA money around from one investment to another. They are also a way to get a short-term tax-free loan from your IRA. An IRA withdrawal is reported on your tax return but is treated as a tax-free transaction if:
You redeposit the amount you withdrew from the IRA into the same or other IRA no later than 60 days after the date you made the withdrawal (the IRS may waive the 60-day requirement under some circumstances, for example, an error by a financial institution).
You do a tax-free rollover only once a year. The 1-year wait period begins on the date you receive the IRA distribution, not on the date you roll it back into another IRA.
The 60-day rule is unchanged, but the 1-year waiting period has been revised.
For years, the IRS has said that the 1-year waiting period applies separately to each IRA you own. Now, following a recent Tax Court case, the IRS says it will treat all of your IRAs as one IRA for purposes of the 1-year waiting period. However, it will not apply this more restrictive interpretation to any rollover that involves a pre-2015 IRA distribution.
For example, suppose in March of 2014, you withdrew the balance from IRA-A and rolled it over into IRA-C within 60 days. In August of 2014, you withdraw the balance from IRA-B and roll it over into IRA-D within 60 days. You haven't previously made any rollovers. Neither withdrawal will be taxed because IRA-A and IRA-B are treated separately for purposes of the 1-year waiting period. But if you were to make two rollovers in 2015, when all of your IRAs will be treated as one when applying the 1-year waiting period, only the withdrawal from the first IRA would be tax-free. The withdrawal from the second IRA would be taxed and also could be hit with a 10% early withdrawal penalty. In addition, the rollover of the second withdrawal into an IRA, to the extent it exceeded any allowable regular contribution you could make to an IRA for 2015, would be treated as an excess contribution subject to a 6% tax unless withdrawn by the return due date for the year of the attempted rollover.
Note that rollovers between Roth IRAs are subject to the same 60-day rule and 1-year wait period that apply to rollovers between traditional IRAs. This means that after 2014, all of your Roth IRAs will be treated as one Roth IRA for purposes of the 1-year wait period between rollovers.