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Tax Court Upends IRA Rollover Rule

Spring 2014 Edition

A major change in IRS guidance will affect clients with multiple retirement accounts. As a result of a recent U.S. Tax Court decision, the IRS has changed its interpretation of the once-per-year IRA rollover rule.

Simply put, the rule states that if an owner takes a distribution from an IRA, she has 60 days to roll those funds into another IRA in order to avoid a taxable distribution. She also must wait a year from the date of the first distribution before making a second one.

The new rule is a significant change. For many years, IRS Publication 590, Individual Retirement Arrangements, said that if an individual has more than one IRA, the rollover rule applies separately to each IRA. The IRS also backed up this stance in two private letter rulings - one dated June 28, 1996 and one from May 6, 1987. But all this was upended earlier this year by a Tax Court case decision in Alvan L. Bobrow et ux vs. Commissioner . A key outcome of this case was the Tax Court's decision to apply the once-per-year rollover rule to all of the taxpayer's IRAs together, not individually. It's rationale was that the language of the tax code limits a taxpayer to one rollover per year, with no qualifiers.

The court said that Congress put limits on IRA rollovers to ensure that taxpayers don't take advantage of the 60-day rule by repeatedly moving funds in and out of their multiple IRAs on a tax-free basis. In other words, the court felt Congress wanted to avoid having taxpayers game the system by trying to “extend” the 60-day rollover period using multiple withdrawals and rollovers.

It's noteworthy to mention that the IRS places no limit on the number of direct transfers between IRAs - that is, where an individual doesn't use or control the funds - because transfers aren't considered distributions or rollovers. As a general practice, we often recommend that our clients move funds between IRAs as direct transfers to lessen the risk of an unintended taxable distribution. In addition, there are some exceptions to the once-per-year rollover rule, such as conversions to Roth IRAs, first-time homebuyer distributions that are canceled or delayed and rollovers made from or to an employer retirement plan like a 401(k).

The new rule will not be enforced until January 1, 2015 so clients who have already done multiple rollovers from separate IRAs will not have to worry about them. As always, please feel free to call our office if you have any questions regarding your own situation.

Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.