Friday, February 28, 2014

IRA Rollovers - One Rollover Per Year Means One Rollover Per Year

William Delaney
(Not one rollover per year from each IRA)

Written by William Delaney, EA, ATA of Westwood, MA 

What happens if a client owns two IRA accounts, requests a distribution from account A and subsequently makes a rollover deposit to new account C within the 60 days allowed for a tax-free rollover?  Nothing happens.  He is allowed one per year.  See IRC 408(d)(3)(B) and Private Letter Ruling 8731041 (5/8/87).

What happens if the client also requests a distribution from account B and subsequently makes a rollover deposit to new account D, again within the 60 day time period?  Again, nothing happens because the IRS letter ruling says that a taxpayer is limited to one from each IRA owned.

Now comes the U.S. Tax Court in Alvan L. Bobrow, et ux. V. Comm., T.C,. Memo 2014-21.  It is a rather complicated case which is not surprising since Mr. Bobrow is an attorney specializing in taxation.  The issue with which we concern ourselves is the distribution and subsequent rollover from account B to account D which occurred in the same twelve month period as the distribution and subsequent rollover from account A to account C.  Are both OK, since there was only one rollover from each account, or is the second rollover in the same twelve month period fatal?

 “Petitioners [in Bobrow] assert that the Section 4008(d)(3)(B) limitation is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer’s IRAs…Petitioners do not cite any supporting case law or statutes that would support their position.”

 The Court opined, however, that “The plain language of Section 408(b)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution.  By its terms, the one-year limitation…is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer.”  “Congress added the…limitation as a way to ensure that taxpayers did not take advantage of Section 408(d)(3)(A) to repeatedly shift nontaxable income in and out of retirement accounts.  See e.g. H.R. Rept. No. 93-779 at 139 (1974), 1974-3 C.B. 244, 381 (“To prevent too much shifting of investments….the bill provides that an individual can transfer amounts between individual retirement accounts only once every three years’( [note:  amended to one year in 1978].

 But, all is not lost.  See footnote 5 to the decision:

“Taxpayers who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering the Sec. 408(d)(3)(B) limitation. See Rev. Rul. 78-406…Transferring funds directly between trustees does not result in a “distribution” within the meaning of sec. 408(d)(3)(A).  Since such funds are not within the direct control and use of the participant, they are not considered to be ‘rollover contributions’.”

So, the moral of the story is quite simple.  Use direct rollovers and never, ever take a direct distribution with the intent to roll it over within the 60 day time period allowed.  The Bobrow taxpayers also missed meeting that requirement!

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