Small Business Taxes & Management

Special Report

IRS Changes Rule on One-Per-Year Limit on IRA Rollovers


Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.


There are two types of rollovers for IRAs--the first is a trustee-to-trustee where the money is transferred by the bank, broker, etc. directly to another bank, broker. There is no limit on the number of such transfers you can make in a year. The second type is when the funds are constructively in your hands. For example, Madison Bank cuts you a check for your CD that matured in your IRA account and you deposit the check in Chatham Investments within 60 days. It doesn't matter that you never cashed the check. Section 408(d)(3)(A)(i) provides generally that any amount distributed from an IRA will not be included in the gross income of the distributee to the extent the amount is paid into an IRA for the benefit of the distributee no later than 60 days after the distributee receives the distribution. Section 408(d)(3)(B) provides than an individual is permitted to make only one rollover described in the preceding sentence in any 1-year period.

Tax professionals, and even the IRS have believed (see Proposed Regulation Sec. (1.408-4(b)(4)(ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs)) that this rule is on an IRA-by-IRA basis. That is, the rule applied to each IRA. If you had five IRAs, you could take the money from each and do a rollover for each one. For example, you had $30,000 in IRA 1 and $20,000 in IRA 2. You could roll over IRA 1 in January and IRA 2 in April of the same year and not incur tax on the rollovers as long as the funds were put into an IRA within 60 days.

However in a recent Tax Court case, Bobrow (T.C. Memo. 2014-21) the Court held the limitation on the number of rollovers was on an aggregate basis, meaning that an individual cold ot make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual's IRAas in the preceding 1-year period.

In Announcement 2014-15 the IRS said it anticipated that it will follow the interpretation of the Code section in Bobrow and intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation. This change in position does not affect trustee-to-trustee transfers because these are not rollovers.

The IRS understands that this change in position will present administrative challenges to financial institutions and IRA trustees where IRS disclosure documents must be amended. Accordingly, the IRS will not apply the Tax Court's decision to any rollover that involves an IRA distribution occurring before January 1, 2015. Moreover, regardless of the ultimate resolution of the Bobrow interpretation (i.e., should the case be appealed and reversed), the IRS expects to issued a proposed regulation that would provide that the IRA rollover limitation applies on an aggregate basis. However, in no event would that regulation be effective before January 1, 2015.

Taxpayers watch the new, and existing rules, carefully. Should the transfer fail to be classified as a rollover, the entire amount becomes income and, if no exception applies, also subject to a 10% penalty.


Copyright 2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 03/20/14