Be Aware of IRA Rollover Rules
A tax court case cast a light on the rules governing and the prudence needed for individual retirement account () rollovers. An IRA rollover is a tax-free distribution of cash or assets from one retirement account to another. Such transactions must be completed within 60 days after the distribution is received from a traditional IRA or an employer’s plan.
The tax code limits tax-free rollovers to one per year for a traditional IRA account. IRS Publication 590 further states “You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.” In Alvan L. Bobrow and Elisa S. Bobrow v. Commissioner of Internal Revenue, the tax court ruled that the one-year period is not based on calendar years, but rather a 12-month period starting on the withdrawal date.
In Bobrow v. IRS, the defendants took withdrawals of equal amounts ($65,064) from the husband’s traditional IRA in April, the husband’s rollover IRA in June and the wife’s traditional IRA in July 2008. According to the IRS, they also deposited $65,064 into the husband’s IRA in June, $65,064 into the husband’s rollover IRA in August and $40,000 into the wife’s IRA at the end of September. All of the accounts were held at Fidelity.
The tax court agreed with the tax agency’s assertion that the transactions violated the 12-month rule on transactions. The Benefits Notes blog noted the exclusion of IRS Publication 590 in the court’s ruling. Specifically, the IRS publication says that if a rollover from existing IRA #1 is made to new IRA #3, no other tax-free rollovers can be made from either account over the next 12 months. A rollover from existing IRA #2 into any other traditional IRA is not prohibited, however.
The couple was also assessed a 20% penalty on the taxes they underpaid because of the rollovers. This penalty was attributable to “negligence or disregard of rules or regulations, or any substantial understatement of income tax.” The court noted the lack of documentation from the Bobrows to support their assertions of the timing of the transactions and what instructions were given to Fidelity. In assigning this penalty, the court noted that the Bobrows failed to produce “documentation that would show a reliance on statements made by Fidelity to evidence that they acted with reasonable cause and in good faith.”
Source: “Alvan L. Bobrow and Elisa S. Bobrow, Petitioners v. Commissioner of Internal Revenue, Respondent,” United States Tax Court, January 28, 2014; IRS Publication 590, Individual Retirement Arrangements (), 2013.
Addendum: As we went to press with the April issue, the
The rule only applies to IRA rollovers. It does not limit the number of trustee-to-trustee transfers, such as moving an IRA account from one broker to another. The key is that transfer involves moving IRA #1 from trustee A (e.g., old broker) to trustee B (e.g., new broker). If the assets of IRA #1 are moved to IRA #3 or distributed to the account holder—even for a period of less than 60 days—before being deposited back into an IRA account, the transaction will be considered a rollover subject to the new restrictions.
The new rule will not go into effect until at least January 1, 2015. See IRS Announcement 2014-15 for more information.