Important IRA Rollover Ruling :: Wamhoff Financial & Accounting


Important IRA Rollover Ruling

There is a rule that states that you may perform one rollover per year. Until a ruling this year, it was always assumed with the guidance of the IRS that this was per IRA. As long as you did not make more than one rollover from the same IRA within a 12 month period you were allowed to roll it over without paying tax or a penalty.

The Tax Court ruled (Bobrow v. Comm’r, T.C. Memo. 2014-21) earlier this year that the one-rollover-per-year rule applies to all of a taxpayer’s IRAs rather than on each individual IRA. That is the exact opposite of what IRS publication 590 says.

Publication 590 states:

Waiting period between rollovers.
Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. 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. The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

Example. You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.

Unfortunately, for the couple that the IRS decided to go back on their own interpretation of the law, the IRS’s publications are not authoritative and are not considered official guidance. In the case of conflicting information the hierarchy considers the Tax Code as more authoritative and supersedes any other guidance. In reviewing Internal Revenue Code Section 408(d)(3)(B) it does not state that it is on a per IRA basis.

The IRS will be updating publication 590 and will begin implementing this change for everyone beginning January 1st 2015. It should be noted that the 12 month period begins from the date the distribution is received and is not on a calendar year basis. After 1/1/2015, consider using direct transfers instead of rollovers to avoid this altogether.