IRS changes rules on IRA to IRA rollovers

In a recent US Tax Court case, Bobrow v. Commissioner, the Tax Court ruled that all IRAs of a taxpayer should be looked at together when it comes to the one-rollover-per-year rule. Based on IRS guidance, IRAs include every type of IRA (traditional, Roth, SEP and SIMPLE). Prior to The Bobrow case, the IRS had applied this only on a per IRA basis.

Overview of the rule change:

The rollover rule prior to January 1, 2015. The rollover rule on or after January 1, 2015.

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The Risks:

  • When the one rollover per year rule is violated, the ineligible funds would be treated as taxable distributions to the IRA owner and contributions to the IRA receiving the funds.
  • IRA owners could be subject to a 6% penalty on the amount in the receiving IRA for each year until removed. Any excess amount would need to be removed through the IRA excess removal process.
  • The amount that violated the one rollover per year rule can never be treated as a rollover contribution to an IRA.

The Alternatives:

An owner can still do unlimited IRA to IRA Transfers (with correct paperwork).

An owner can still do unlimited direct or indirect rollovers between an IRA and a

Qualified Plan. [Examples: 401(k) to IRA, IRA to 401(k)]

There is no limit on the number of direct or indirect traditional IRA to Roth conversion

The Impact:

In order for IRA owners to retain their right to do a rollover, producers should have IRA owners perform Trustee to Trustee Transfers of IRA funds, rather than indirect rollovers.

Agents may want to reconsider using Agent-Ordered funds without using a transfer form with proper acceptance language. Incoming funds into an Allianz IRA without proper paperwork will be shown in the rollover box on IRS Form 5498.

Also- Allianz generally treats funds leaving an Allianz IRA without transfer paperwork and letter of acceptance as a distribution (reported on IRS Form 1099-R) so it’s imperative to be sure to provide all the transfer paperwork!

NOTE: If IRA owners move funds via IRA Trustee to Trustee Transfer using correct paperwork, they avoid the associated risks!

FAQ:

  1. When did the IRS announce this rule?

    Following the court decision the IRS issued Announcement 2014-15, stating the IRS’ intention of enforcing the new aggregated one-rollover-per-year rule. Enforcement will begin January 1, 2015, and only applies to distributions after 2014 per IRS Announcement 2014-32.

  2. How does this impact Allianz’s distribution reporting?

    Generally, Allianz codes funds leaving an Allianz IRA without transfer paperwork and letter of acceptance as a distribution (reported on an IRS Form 1099-R) rather than a transfer (which is not reported). Putting these funds into the same or another IRA would count as an indirect IRA rollover.

  3. How will this affect reinstatement of contract values and benefits?

    A reinstatement of benefits on an existing IRA is treated as an IRA to IRA rollover for tax reporting purposes. An owner may not be eligible to reinstate a withdrawal if she/he has already done a previous 60-day rollover within the 12 month period starting the day the owner received the previous distribution.

    Also, using the reinstatement provision will preclude an IRA owner from taking any other tax-free IRA to IRA rollovers for a one-year period.

  4. What are the alternative options available?

    An owner can still do unlimited IRA to IRA Trustee to Trustee transfers (with correct paperwork). An owner can still do unlimited direct or indirect rollovers between an IRA and a Qualified Plan. [Examples: 401(k) to IRA, IRA to 401(k)]

    There is no limit on the number of direct or indirect traditional IRA to Roth conversions.

  5. Request for Review:

    If an IRA owner feels we incorrectly tax reported activity, please contact your VTC or team specialist to review the matter.

  6. What happens if someone rolls over more than one IRA distribution into another of their IRAs after Jan 1, 2015?

    If the one-rollover per year rule is violated, the funds would be treated as a taxable distribution to the IRA owner and applied to the receiving IRA as a regular contribution rather than a rollover contribution. This may result in an excess IRA contribution for the respective tax year. IRA owners could be subject to 6% penalty on the excess amounts (any amount above their contribution limits) for each year until removed. Any excess amount would need to be removed through the IRA excess contribution removal process.

    Also, those violation amounts can never be treated as a rollover contribution back into an IRA. For more information please refer caller to a tax advisor.

  7. Does the one-rollover-per year rule apply to all types of rollovers?

    The one-rollover-per-year rule applies only to indirect (60-day) IRA to IRA rollovers.

Traditional, SEP, SIMPLE IRAs and Roth IRAs will be aggregated for purposes of the rule. Thus, a rollover between an individual’s Roth IRAs would preclude a separate rollover within the same one-year period between the individual’s Traditional, SEP or SIMPLE IRA’s and vice-versa.

Please also keep in mind:

An owner can still do unlimited IRA to IRA Trustee to Trustee transfers (with correct paperwork). An owner can still do unlimited direct or indirect rollovers between an IRA and a Qualified Plan. [Examples: 401(k) to IRA, IRA to 401(k)]

There is no limit on the number of direct or indirect traditional IRA to Roth conversions.

This document is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, Allianz Life Insurance Company of New York, their affiliated companies, and their representatives and employees do not give legal or tax advice. Encourage your clients to consult their tax advisor or attorney.

Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427, www.allianzlife.com. In New York, products are issued by Allianz Life Insurance Company of New York, One Chase Manhattan Plaza, 38th Floor, New York, NY 10005-1423 www.allianzlife.com/newyork. Variable products are distributed by their affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. Only Allianz Life Insurance Company of New York is authorized to offer annuities and life insurance in the state of New York.

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