The IRS will soon be changing the rules that regulate how often you can take tax-free rollovers out of your IRA. Tax-free rollovers are distributions from an IRA that are payable to the account owner, but which are re-deposited into the IRA (or into another IRA) within 60 days. Under current rules, you are allowed to take one tax-free rollover from each of your IRAs once every 12 months.
Example: Johnny has seven IRAs, each of which holds $50,000. On April 1, 2014, Johnny withdraws $45,000 from IRA #1 and buys himself a new car. On May 20, 2014, Johnny withdraws $45,000 from IRA #2, and on the same day he deposits the $45,000 back into IRA #1. On July 10, 2014, Johnny withdraws $45,000 from IRA #3, and on the same day he deposits the $45,000 back into IRA #2. Johnny continues this throughout the year, withdrawing and depositing every 50 days or so, one IRA at a time. Because Johnny never takes more than one rollover distribution from each IRA during 2014 and he re-deposits all withdrawals within 60 days, none of Johnny’s distributions are considered taxable distributions, including the one that paid for Johnny’s new car.
Effective January 1, 2015, any distribution from an IRA that would otherwise qualify as a tax-free rollover will only be considered a tax-free rollover if the IRA owner has not taken a tax-free rollover from any of his or her other IRAs over the prior 12 months. In the example above, the second distribution that Johnny takes from an IRA in 2015 will be considered a taxable distribution, regardless of whether Johnny is able to re-deposit the amount into the same (or another) IRA within 60 days. A similar rule will also be in effect for Roth IRAs. Significantly, this new rule only affects tax-free rollovers from IRAs, i.e., distributions made payable to the IRA owner. The new rule does not affect how often an IRA owner can initiate a tax-free transfer among IRAs, i.e., money transferred directly from one IRA to another.