3713.06 / What should individuals understand about the “once per year” IRA rollover rule?

Violating the “once per year” IRA rollover rule is an expensive mistake that cannot simply be corrected or waived. Because the IRS cannot waive a violation of the once-per-year rule, it’s especially important to pay close attention to avoid falling into the potential traps that can cause the client to violate the rule and incur significant tax consequences.

Taxpayers can complete nontaxable rollovers between IRAs as long as the funds from the first IRA are deposited into the second IRA within 60 days. However, the taxpayer can only do this once in any 12-month period. If the taxpayer makes a second rollover within 12 months of the first rollover, the entire amount that was intended for rollover will be deemed distributed in a fully taxable transaction.

If the taxpayer was not eligible to withdraw funds from the IRA because he or she had not reached age 59 ½, the taxpayer can also be subject to the 10 percent early withdrawal penalty on top of his or her ordinary income tax rates. The rollover can also trigger the 6 percent tax on excess IRA contributions if the mistake is not corrected on time.

The rule applies to all IRAs—including traditional IRAs and Roth IRAs. It does not apply to rollovers between IRAs and employer-sponsored 401(k) plans. The rule also applies to all types of IRAs, so if the taxpayer has a SEP IRA, SIMPLE IRA or Roth IRA, the taxpayer is limited to one rollover per year across all types of accounts (Roth conversions do not count as rollovers).

The one IRA-to-IRA rollover per year rule applies regardless of how many IRAs the taxpayer has. This represents a change from prior thinking, where many believed that taxpayers with multiple IRAs could complete one tax-free rollover per IRA per year. The IRS confirmed that this new interpretation will be enforced beginning January 1, 2015.

The once-per-year rule is not actually a calendar year rule. It applies on a 12-month basis. The taxpayer cannot, therefore, complete one rollover late in 2023 and another early in 2024 without penalty.

Taxpayers who inherit IRAs from a deceased spouse must also watch out for the once-per year rule. If the taxpayer has executed another IRA rollover within the preceding 12-month period, that taxpayer cannot immediately roll the inherited funds into his or her own IRA. Instead, the surviving spouse must wait until 12 months have passed from the date of the previous rollover in order to avoid violating the rule.

Taxpayers with certificates of deposits (CDs) that are actually registered as IRAs should also be advised of the rule when determining how to treat the matured CD funds—remembering that many taxpayer may not even realize that their CD investment is actually registered as an IRA in their name.

The simplest way to avoid violating the once-per-year rollover rule is to move IRA funds via direct trustee-to-trustee transfer between financial institutions. These direct transfers accomplish the goal of consolidating accounts, but they are not treated as rollovers.

Perhaps the most confusing aspect of the once-per-year rule is that it actually applies to distributions of IRA funds. It is the date when the taxpayer receives the distribution from the IRA that is actually relevant in determining whether 12 months have elapsed.

If the taxpayer receives “distribution A” on November 15, 2024 and rolls it into another IRA on December 15, 2024, and later receives “distribution B” on November 20, 2025, the client can roll distribution B into an IRA on November 21, 2025 without violating the rule. That’s because more than 12 months have passed between her receipt of distribution A and distribution B.

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Planning Point: The once-per-year IRA rollover rule is complicated. For most clients, the best solution is likely to rely on direct transfers of IRA funds between accounts to avoid the serious tax consequences that one simple mistake can generate.

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