Friday, December 26, 2014

IRA Rollovers Clarified

It is well known that a taxpayer does not have to pay tax on a trustee-trustee transfer of an IRA into another IRA.  It is also well know that an IRA distribution is not taxable if the distribution is rolled into an IRA within 60 days of the distribution.  It is also well known that a taxpayer can only perform such a rollover once every 365 days.  It also has been a known fact that the once-every-365-days applies only to the two IRA accounts involved in the rollover and a taxpayer could still do another rollover as long as it involves two other IRA accounts.  This position was in IRS Publication 590 and IRS regulations.

IRS challenged Mr. Bobrow (TC Memo 2014-21) who performed multiple rollovers in a tax year even though no rollover involved a tainted account.  Basically IRS argued its own regulations and Publication 590 were an incorrect interpretation of the Internal Revenue Code.  Tax Court ruled in favor of IRS stating the restriction applies to all of the taxpayer’s IRAs as if they were one IRA.  Basically Tax Court said a rollover from one of a taxpayer’s IRA accounts to another of the taxpayer’s IRA accounts restricts the taxpayer from performing such a rollover for the next 365 days regardless of what IRA accounts were involved.  Now IRS is rewriting the regulation and Publication 590 to match Tax Court’s position.  IRS has generously said it will not enforce its new regulations on any rollover that takes place before January 1, 2015.

NOW THE LATEST information can be found in Announcement 2014-32.  We’ll present the main issues numerically:

  1. Any IRA accounts involved in rollovers taking place during 2014 under the former rules are considered “tainted” for one year just as they were under the old rules.  Example, some funds from IRA account #1 were rolled into IRA account #2 within the required 60 days.  IRA accounts #1 & #2 are both tainted and cannot be involved in another IRA rollover for the following 365 days.
  2. Beginning January 1, 2015, every taxpayer is considered to have one IRA regardless of how many different financial planners are used or how many different investment accounts exist.  This “IRA” includes the taxpayer’s traditional IRAs, SEP IRAs, SIMPLE IRAs, and Roth IRAs.  They are all combined and considered one IRA for purposes of the once-every-365-days rollover provision.
  3. Any untainted IRA account can be involved in a rollover during 2015.  Example continued from above - the taxpayer can rollover money from one IRA to another IRA during 2015 as long as IRA account #1 and IRA account #2 are not involved in the new rollover within their “tainted” period.
  4. Once a rollover happens in 2015, the taxpayer’s IRA is tainted for one year.  Example continued from 1) above – the taxpayer cannot do another rollover from any IRA account to another IRA account at any time within the following 365 days.  Or in other words, a rollover after December 31, 2014 “taints” all of the taxpayer’s IRA accounts including the taxpayer’s Roth IRAs.
  5. This “tainting” does NOT apply to conversions, reconversions, recharacterizations, or trustee-trustee transfers.

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