How the One Rollover Per Year Rule Works

Moving funds between retirement accounts is a common financial strategy. The Internal Revenue Service (IRS) has specific regulations for these transfers, particularly for Individual Retirement Arrangements (IRAs). The one-rollover-per-year rule is a regulation that IRA owners must understand to avoid unintended tax consequences.

Defining the One-Rollover-Per-Year Rule

The one-rollover-per-year rule, found in Internal Revenue Code Section 408, states that an individual can make only one tax-free IRA-to-IRA rollover within any 12-month period. This limitation became stricter following the 2014 Tax Court case Bobrow v. Commissioner. Previously, the rule was applied on a per-IRA basis, but it now applies to all of a person’s IRAs combined.

This is known as the IRA aggregation rule. If you have multiple IRAs, such as Traditional, Roth, SEP, or SIMPLE IRAs, a rollover from any one of them prevents another rollover from any of them for 12 months. The clock starts on the date you receive the distribution from the first IRA.

The “one-year” period is not a calendar year but a rolling 365-day period. For instance, if you receive a distribution on July 15, 2024, and complete a rollover, you cannot initiate another IRA-to-IRA rollover until July 15, 2025.

Transactions Subject to the Rule

The one-rollover-per-year limitation targets a specific transaction: the 60-day indirect rollover. This process begins when you request a distribution from your IRA custodian, and the financial institution sends the funds directly to you as a check or direct deposit. From the date you receive the funds, you have a 60-day window to deposit them into another IRA to keep the transaction tax-free.

The rule is designed to limit individuals from using their IRA funds as a series of short-term loans. Attempting a second indirect rollover from any of your IRAs within the 12-month period will violate the rule.

Transactions Not Subject to the Rule

Several methods for moving retirement funds are not classified as rollovers for this rule and are not restricted. The most common is the trustee-to-trustee transfer, where funds are moved directly from one financial institution to another without you taking control of the money. Since the funds are not paid to you, this is a transfer, and you can make an unlimited number of them per year.

Another exception is a Roth conversion. When you move funds from a Traditional, SEP, or SIMPLE IRA to a Roth IRA, it is a conversion, not a rollover. These transactions are not subject to the one-rollover-per-year limit, allowing you to perform a Roth conversion even after a recent 60-day indirect rollover.

Moving money from an employer-sponsored plan, like a 401(k) or 403(b), into an IRA is also not an IRA-to-IRA rollover. This plan-to-IRA rollover does not start the 12-month clock. You can roll over assets from a 401(k) into your IRA and still perform a separate IRA-to-IRA indirect rollover within the same 12-month period.

Consequences of a Violation

Violating the one-rollover-per-year rule carries financial penalties. If you attempt a second indirect rollover within the restricted 12-month period, that distribution is disqualified from being a tax-free rollover. The entire amount is treated as a taxable distribution and must be included in your gross income for that tax year.

In addition to income tax, if you are under age 59½, the distribution may be subject to a 10% early withdrawal penalty under IRC Section 72. This penalty applies to the taxable portion of the distribution, meaning you could face both your ordinary income tax rate and the 10% penalty.

The funds deposited into the second IRA are also impacted. Because the rollover was disallowed, the IRS considers this deposit an excess contribution. Under IRC Section 4973, excess contributions are subject to a 6% excise tax for each year they remain in the account until properly removed.