How are Annuities Affected by the New 2015 Rollover Rules?

The Internal Revenue Service is changing the IRA rollover rules this year – if you don’t know about this change it could hurt you.

Beginning in 2015, you can only make one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual’s IRAs including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs effectively, treating them as one IRA for purposes of the limit.

Does this mean you are limited to a single transfer from a 401k or IRA to a new investment or annuity firm in 2015? No. There is no limit on custodian to custodian transfers – sometimes referred to as rollover transfers.  The rollover situations that are impacted are those where an IRA custodian creates a check and disburses those funds to the account holder. Once the account holder takes possession of their funds, the account holder has… [continued below video]

Video: The Annuity Guys, Dick and Eric, discuss the new IRS rollover rules and how it could impact your money movement in 2015.

Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified. 

…sixty days in which they can “roll” the funds over into another IRA to avoid paying taxes or penalties on the disbursed dollars. (The IRA account holder previously had the ability to rollover an IRA once per year per IRA; however, at present, it is only once for all the IRA account holders aggregated IRAs.)

Why does this matter? There are a number of advisors who prefer to do rollovers so they can more efficiently expedite the movement of funds from a custodian that is being replaced into their control. Doing this now still works… but if you do this twice – knowingly or unknowingly – you could trigger a taxable event on ALL the dollars involved in all of your aggregated IRAs..

Want more information, here is an article from the IRS…

IRA One-Rollover-Per-Year Rule

Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement  2014-15 andAnnouncement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.

• Trustee-to-trustee transfers between IRAs are not limited
• Rollovers from traditional to Roth IRAs (“conversions”) are not limited

Transition rule ignores some 2014 distributions

IRA distributions rolled over to another (or the same) IRA in 2014 will not prevent a 2015 distribution from being rolled over provided the 2015 distribution is from a different IRA involved in the 2014 rollover.

Example: If you have three traditional IRAs, IRA-1, IRA-2 and IRA-3, and in 2014 you took a distribution from IRA-1 and rolled it into IRA-2, you could not roll over a distribution from IRA-1 or IRA-2 within a year of the 2014 distribution but you could roll over a distribution from IRA-3. This transition rule applies only to 2014 distributions and only if different IRAs are involved. So if you took a distribution from IRA-1 on January 1, 2015, and rolled it over into IRA-2 the same day, you could not roll over any other 2015 IRA distribution (unless it’s a conversion).

Background of the one-per-year rule

Under the basic rollover rule, you don’t have to include in your gross income any amount distributed to you from an IRA if you deposit the amount into another eligible plan (including an IRA) within 60 days (Internal Revenue Code Section 408(d)(3)). Internal Revenue Code Section 408(d)(3)(B) limits taxpayers to one IRA-to-IRA rollover in any 12-month period. Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), published in 1981, and IRS Publication 590, Individual Retirement Arrangements (IRAs) interpreted this limitation as applying on an IRA-by-IRA basis, meaning a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual. However, the Tax Court held in 2014 that you can’t make a non-taxable rollover from one IRA to another if you have already made a rollover from any of your IRAs in the preceding 1-year period (Bobrow v. Commissioner, T.C. Memo. 2014-21).

Tax consequences of the one-rollover-per-year limit

Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts:

• you must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months (unless the transition rule above applies), and
• you may be subject to the 10% early withdrawal tax on the amounts you include in gross income.

Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be:

• treated as an excess contribution, and
• taxed at 6% per year as long as they remain in the IRA.

Direct transfers of IRA money are not limited

This change won’t affect your ability to transfer funds from one IRA trustee directly to another, because this type of transfer isn’t a rollover (Revenue Ruling 78-406, 1978-2 C.B. 157). The one-rollover-per-year rule of Internal Revenue Code Section 408(d)(3)(B) applies only to rollovers.