The IRS has withdrawn proposed regulations covering IRA rollovers. The change is significant because it supports a Tax Court interpretation of the rollover rules creating a possible “gotcha” for the unwary. If you are considering doing a rollover where you actually withdraw the funds then deposit them into a new IRA within the 60 day window, you need to be aware of this change. Custodian to custodian direct transfers are not affected.
Starting January 1, 2015, a non-custodial rollover is limited to one per year regardless of how many IRA accounts you have. Previously, you could make one such rollover per year from each separate IRA.
The IRA rules are complicated and often unforgiving. You should discuss any IRA transfers and withdrawals with your tax advisor before you make any changes to your IRA accounts. Here is the excerpt from the Federal Tax Weekly, Issue 29, July 17, 2014:
IRS Withdraws Proposed Reg To Reflect Bobrow’s One-Rollover-Per-Year Limit On IRAs
◆ NPRM REG-209459-78
Reflecting the Tax Court’s decision in Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), the IRS has withdrawn Prop. Reg. §1.408-4(b)(4)(ii). This withdrawal makes good on its announced intention earlier in Ann. 2014-15 to follow this pro-government decision. In Bobrow, the Tax Court found that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained.
- CCH Take Away. “The Bobrow decision affects only IRA to IRA rollovers,” Rob Kaplan, Ballard Spahr LLP, Philadelphia, told CCH. Bobrow does not affect the ability of an IRA owner to transfer funds from one IRA trustee or custodian directly to another, because a transfer is not a rollover and is not subject to the one-rollover-per-year limit, Kaplan explained. Bobrow also does not apply to rollovers from a 401(k) plan to an IRA. For example, an individual can take a 401(k) distribution from a former employer, roll it over to an IRA and subsequently roll it over to a plan with a new employer without violating the one-rollover-per-year rule, Kaplan noted.
Generally, Code Sec. 408(d)(3)(A)(i) allows a tax-free rollover of an IRA if the funds distributed to the taxpayer are rolled over into an IRA for the taxpayer’s benefit within 60 days, subject to the one-rollover per-year limit of Code Sec. 408(d)(3)(B). The Tax Court found in Bobrow that the one-year limitation under Code Sec. 408(d) (3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. A taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year, the court held. After the Tax Court announced its decision, the IRS issued Ann. 2014-15, indicating it “anticipates that it will follow the interpretation of §408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation.”
- Comment. At press time, the IRS has not yet issued new regs. The IRS has indicated that it will not apply the Bobrow ruling before January 1, 2015, Kaplan told CCH.
In 1981, the IRS issued a proposed reg that would have provided that the rollover limitation of Code Sec. 408(d)(3)(B) would be applied on an IRA-by-IRA basis. The proposed reg is contrary to the Tax Court’s decision in Bobrow. Under Bobrow, an individual cannot make an IRA-to-IRA rollover if the individual has made an IRA-to-IRA rollover involving any of the individual’s IRAs within the preceding one-year period. As a result, the IRS has withdrawn the proposed reg.
The taxpayers in Bobrow asked the Tax Court to reconsider its decision based on the IRS’s published guidance (Publication 590). The court denied the motion for reconsideration and reminded the taxpayers that the IRS’s published guidance is not binding precedent.
- Comment. The IRS has apparently not yet updated its online version of Publication 590 to reflect Bobrow.
References: FED ¶49,620 ; TRC RETIRE: 66,702
For more information regarding this or any other tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.
In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.