News & Resources

Rules Involving IRA Rollovers Become Less Friendly to Taxpayers

Earlier this year, the U.S. Tax Court made a controversial ruling regarding IRA rollovers that contradicted an IRS publication designed to explain the law to taxpayers. In Bobrow v. Commissioner, the court ruled that the one-rollover-per-year rule applies to all of a taxpayer’s IRAs in aggregate, rather than on an account-by-account basis. The IRS had previously indicated that the rollover rules applied on an account-by-account basis.

Soon after, the IRS announced that it would adopt the court’s less taxpayer-friendly interpretation of the rollover rules. The IRS intends to propose regulations that provide the IRA rollover limitation applies on an aggregate basis. However, it understands that IRA trustees will be required to make changes in how they process IRA rollovers and draft IRA disclosure documents. Accordingly, the IRS announced that it won’t apply the new interpretation to any rollover that involves an IRA distribution occurring before Jan. 1, 2015.

Consequently, Taxpayers with multiple IRAs will have to be much more careful when making rollovers to ensure they don’t violate the aggregate rules and generate unnecessary tax liability — and possibly interest and penalties.

Snapshot of Bobrow

In Bobrow, the Taxpayer received a series of IRA distributions involving several IRA accounts. He didn’t report any of the distributions as income, claiming that all the distributions had been rolled over tax-free.

The Tax Court ruled that the Taxpayer had used up his one-rollover-per-year privilege on his first distribution and, therefore, subsequent distributions were taxable. In addition to the federal taxes related to the disqualified rollovers, the Tax Court upheld a 20% accuracy-related penalty on the unpaid balance.

Some exceptions remain

There are still some important exceptions to the one-rollover-per-year limitation. Neither of the following transactions counts as a rollover for purposes of this limitation:

  1. A direct trustee-to-trustee transfer made from one IRA to another without passing through the taxpayer’s hands.
  2. A distribution from a qualified retirement plan that is rolled over into an IRA.

Also be aware that, in the case of married individuals, the one-rollover-per-year rule is applied separately to IRAs owned by the individual and to IRAs owned by the individual’s spouse. So what your spouse does with his or her IRAs has no effect on what you can do with your IRAs.

Points to remember

The general statutory rule is that an amount distributed from an IRA (except to the extent the distribution consists of nondeductible contributions) must be included in the recipient’s gross income for federal income tax purposes. If the taxpayer is under age 59½, a 10% early withdrawal penalty generally also will apply.

An exception to the income inclusion and early withdrawal penalty may apply, however, when the distributed amount is rolled over into an IRA, individual retirement annuity or qualified retirement plan, such as a 401(k), by no later than the 60th day after the day on which the taxpayer received the distribution.

In addition, you need to be aware that:

  • The 60-day period begins the day after you receive the distribution.
  • The funds are due back in an IRA on the 60th day. You don’t get a break if the 60th day falls on a holiday or weekend.
  • If you make the contribution after the 60-day deadline, you could be subject to a 6% excess contribution penalty.
  • The same property must be rolled over. For example, if you withdraw 100 shares of ABC Company from IRA-1, those shares must be rolled over to IRA-2.
  • You can’t roll over a required minimum distribution.

•   The one-year waiting period between rollovers begins the day you receive the

If you’re considering an IRA rollover, please contact us to make sure it will meet the applicable rules and avoid unnecessary taxes and penalties.