The once-per-year limit on IRA-to-IRA rollovers is a terrible trap for unwary taxpayers. It’s easy to fall into, but also easy to avoid.

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. That’s according to 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, more tragically, Individual B 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 B’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 avoid this trap:

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.

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, the payment can be deposited back into an IRA without regard to the once-per-12-months rule.

For full details on the once-per-12-months limit, see IRS Publication 590. We recommend that you consult a tax professional if you’re considering an IRA rollover.