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How to Avoid This IRA-to-IRA Rollover Trap

Contributor Natalie Choate reviews a few ways to get around the once-per-year limit.

The once-per-year limit on IRA-to-IRA rollovers is a terrible trap for unwary taxpayers. It is ridiculously easy to avoid the trap--and ridiculously easy to fall into it. The IRS is sympathetic, but mostly it's helpless.

Here is the rule: If you receive a distribution from an IRA, you cannot roll that distribution over into any IRA if the distribution is received by you less than 12 months after another IRA distribution you received that you rolled over into an IRA. So says Internal Revenue Code Section 408(d)(3)(B).

Meant to prevent IRA owners from "kiting" their IRA distributions (keeping money perpetually outside the IRA by a series of rollovers), the rule traps mostly innocent bystanders. For example, investor "A" inherits an IRA from her deceased spouse. She cannot roll over a distribution from that inherited IRA if within the past 12 months she received a distribution from her own IRA account that she rolled over tax-free into an IRA. She'll have to wait to take the distribution from the inherited IRA until after the 12 months have passed.

Or IRA owner "B" who has a certificate of deposit registered as an IRA at a particular bank: The CD matures, the bank closes the IRA and mails him a check, which he deposits into his main IRA. That's a rollover, which prevents him from doing an IRA-to-IRA rollover for any other IRA distribution he may receive within the next 12 months. Let's hope he doesn't have any other CD-IRAs maturing soon!

Or, most tragically, individual "C" who is losing mental capacity takes distributions from his IRAs without being aware of the financial effects. A guardian is appointed for him and tries to roll the money back into C's IRAs, but the once-per-year limit would apparently permit only one such distribution to be "rolled back." 

Unlike with missing the 60-day deadline for completing a rollover, the IRS does not have the ability to waive the once-per-year limit in cases of hardship.

Here is a list of all known ways to beat this rule--the statutory and regulatory exceptions and the "Hail Mary pass" arguments.

The limit does not apply to IRA-to-IRA transfers. NEVER do a rollover. ONLY do plan-to-plan transfers, where money is transferred directly from one IRA provider to the other IRA provider. This is the best way to transfer money between retirement accounts. The once-per-12-months rule does not apply to direct transfers. A client can move money among his various IRAs 10 times per week, if he uses direct transfers. This is what IRA owner B should try to get the CD-issuing bank to do for him when the CD matures, rather than giving him a check. A "Hail Mary" idea: If B receives a check from the CD bank payable to him personally and endorses it over to the receiving IRA, the IRS position is that this is a distribution followed by a rollover, but perhaps B could persuade the IRS that it should be treated as a direct transfer since he never cashed the check or put the money into any taxable account. If the IRS is looking for ways to soften the harsh once-per-12-months rule without violating the Code, this is a way to do it.

The limit does not apply to transfers to or from a non-IRA account. There is no limit on how many times an individual can "roll" money between an IRA and a qualified plan (such as a 401(k) plan); § 408(d)(3)(B) applies only to IRA-to-IRA rollovers. An individual who finds himself receiving an IRA distribution that he cannot roll back into an IRA because of the once-per-12-months limit can roll the money into a 401(k) plan with no problem. Of course that assumes the individual is a participant in a 401(k) plan that accepts rollovers from IRAs. In other words, this doesn't help many people.

Roth conversions are not subject to the rule. Someone stuck with a second IRA distribution and unable to roll it into any account because of the rule can convert it to a Roth IRA. She will have to pay tax on the distribution, but at least she will still have her money in some kind of retirement account.

Exception for first-time homebuyers. If someone takes out a "first-time homebuyer" distribution but then the purchase falls through, he can return the distribution to the IRA within the applicable time limit, without regard to the once-per-12-months rule.

Rule does not apply to "restorative" payments. When an individual receives money from a lawsuit judgment or settlement for transactions that occurred inside his IRA (see my January column), the payment can be deposited back into an IRA without regard to the once-per-12-months rule. Here's another Hail Mary idea: Perhaps the IRS might consider multiple rollovers to be a "restorative payment" in a case like C's above--where the IRA owner's lack of mental capacity caused him to withdraw funds from his IRA without understanding what he was doing. Since the distributions were not made knowingly, perhaps they could be considered like the "wrongful" takings that can be restored (without regard to the once-per-12-months limit) when an IRA owner wins a lawsuit.

Multiple distributions considered one distribution? The limits of this potential exception are not clearly defined, but it does appear that if you ask your IRA provider to distribute your entire account, and the IRA provider (instead of giving you one big check) sends you the money in a few separate installments (maybe sending you the cash right away, and securities sales proceeds a little later), you should be able to consider that a single distribution. The IRS has appeared to apply this concept in at least one private letter ruling.

Distribution due to financial institution error. The IRS seemed to ignore the once-per-12-months limit when one of the distributions was due to a financial institution's error; see PLR 2011-13047.

Where to read more: For full details on the once-per-12-months limit, see IRC § 408(d)(3)(B) and 2.6.05 of the author's book Life and Death Planning for Retirement Benefits (8th ed. 2019), See also § 72(t)(8)(E); Treas. Regs. § 1.408A-4, A-1(a), § 1.408A-5, A-8; IRS Announcement 2014-32; and PLRs 2015-11036, 2017-07001, and 2007-19017.

Natalie Choate is an estate planning lawyer in Boston with Nutter McClennen & Fish LLP. Her practice is limited to consulting regarding retirement benefits. The new 2019 edition of her best-selling book, Life and Death Planning for Retirement Benefits, is now available through her website,, where you can also see Natalie’s speaking schedule and submit questions for this column. The views expressed in this article may or may not reflect the views of Morningstar.