IRA ROLLOVER ROLLER-COASTER: HOW TO ROLLOVER AN IRA FOLLOWING BOBROW AND IRS ANNOUNCEMENT 2014-15

In a recent case known as Bobrow v. Commissioner,  the U.S. Tax Court held that an IRA owner may only conduct one 60-day IRA rollover within a one year period for all of their IRAs. This holding from the Tax Court, was in opposition to the customs of many IRA custodians, financial advisors, and to IRS Publication 590. For more on Bobrow, and the rationale from the Tax Court please check out my prior blog article here.

Following Bobrow, the IRS issued Announcement 2014-15 and stated that the IRS was going to amend its guidance to taxpayers in Publication 590 and was going to adopt the Tax Court’s position of one 60-day Rollover per IRA per year

As a result of Bobrow and IRS Announcement 2014-15, taxpayers should consider the following issues when rolling over an IRA.

  1. Trustee to Trustee Transfers – If you want to change IRA custodians, the best way is via a trustee to trustee transfer whereby your old custodian transfers your IRA funds to your new custodian. Funds are sent directly from your old IRA to your new IRA and you as the IRA owner never touch the funds. IRA owners can still do as many trustee-to-trustee transfers as they want.
  2. New Rule to be Enforced in 2015 – The One 60-Day Rollover Per One Year Period rule won’t be enforced by the IRS until 2015. So don’t stress if you’ve already conducted multiple 60-Day rollovers over multiple accounts within a one year period. That is, unless your last name isn’t Bobrow.
  3. One 60-Day Rollover per 1-Year Period, Not Per Tax Year- The new rule has been explained as One 60-Day Rollover Per Year, however, the actual code (IRC 408(d)(3)(B) states per “1-year period” from the date of the last 60 Day Rollover. As a result, don’t think of one per tax year but rather think one can be done 1-year following the last 60 Day Rollover conducted by the IRA owner.
  4. One 60-Day Rollover Per Roth IRA and One Per Traditional IRA Per 1-Year Period – Based on my analysis of the Code, individuals would be allowed one 60-Day Rollover per Traditional IRA and one per Roth IRA.  The analysis is certainly complex but I’ve tried to summarize it below. Traditional IRAs are governed by IRC 408. IRC 408(d)(3)(B) is the section which limits 60 day rollovers to one per 1 year period and this was the section the Tax Court relied on in Bobrow. Roth IRAs are governed by IRC 408A, and IRC 408A(e) is the section that enables 60-Day rollover contributions for Roth IRAs. Under, IRC 408A(e) the code allows Roth IRA qualified rollover contributions that meet the requirements of IRC 408(d)(3) [the traditional IRA code section] but specifically states that, “For purposes of IRC 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.” In other words, the section enabling Roth IRA rollovers states that you only count the number of Roth IRA rollovers when considering the one-year rollover rule for a Roth IRA Rollover. As a result, even if the taxpayer had conducted a rollover of a traditional IRA in the prior twelve-month period, this rollover would not be counted in applying the one 60-Day rollover per year rule for the Roth IRA. This application of a separate One-Rollover-Per-Year  for Roth and Traditional IRAs is also the position the IRS appears to be taking. In the IRS summary of the IRA One-Rollover-Per Year Rule, the IRS explained the One-60 Day Rollover per IRA rule for traditional IRAs and then stated that, “A similar limitation would apply to Roth IRAs.” Rather than lumping the Roth IRAs into Traditional IRAs for purposes of the rule, the IRS seems to be treating them separately. It would be nice though if they could be more clear on this issue before 2015 “rolls” around.

So, in sum, always opt for trustee-to-trustee transfers of IRA funds (where possible) and avoid taking a 60-Day Rollover from an IRA unless you are certain you have not conducted one in the prior 1-year period.

60 DAY IRA ROLLOVERS: TAX COURT SAYS DON’T FOLLOW IRS GUIDANCE

A recent U.S. Tax Court case, Bobrow v. Commisioner, T.C. Memo 2014-21, held that a taxpayer may only conduct one 60-day rollover of retirement plan funds per 1-year period. The Court’s opinion was a drastic change from what most taxpayers and professionals understood and from what the IRS has explained in its own publications.

The relevant facts of Bobrow are as follows. Mr. Bobrow conducted two 60-day rollovers in a 1-year period with two separate IRA accounts. He received both sums of money personally and paid them back into his two respective IRAs each within 60 days. Mr. Bobrow, presumably, believed that since he had two different IRAs that he could do two separate 60-day rollovers with those accounts without having either account subject to withdrawal. While Mr. Bobrow relied on a commonly accepted practice that was supported clearly by IRS guidance, the Tax Court disagreed based on the language of IRC 408 (d)(3)(B).

A 60-day rollover is often used by retirement account owners who temporarily roll-over money to themselves personally from their existing retirement account and re-deposit the funds into a new custodian’s retirement account within 60 days.  A 60-day rollover, however, is not to be confused with a trustee to trustee transfer or even a direct rollover, whereby retirement account funds are sent from the prior custodian or trustee of the retirement account funds to the new custodian or trustee. These types of transactions can be done as many times as an account owner desires and do not result in a retirement account owner’s personal receipt of retirement account funds or withdrawal under the tax rules. A 60-day rollover, on the other hand, is sent to the retirement account owner in their own name and can be deposited and used by the retirement account owner during the 60-day period so long as the funds are returned to the retirement account or to a new account within 60-days. A 60-day rollover is sometimes used by retirement account owners who, for example, withdraw funds from their IRA for short-term personal use or investment and then return the withdrawn funds to their IRA within 60-days.

Under IRC 408 (d)(3)(A), an IRA owner’s withdrawal from an IRA is not taxable when returned or deposited into a new IRA within 60 days. However, the question posed in the Bobrow case was how many 60-day rollovers can an individual do in a 1-year period. The 60-day rollover exception is limited in the Code when an individual has already received one 60-day roll-over from an IRA in the past 12 months. The Code specifically states that the 60-day rollover exception cannot be used if the individual has already completed and relied on the exception for a 60-day rollover in the prior 1-year period. IRC 408(d)(3)(B). It has been unclear, however, whether the one 60-day rollover per year applied on a per IRA basis or whether it applied to the individual for all of their accounts.

The IRS had clarified that questions and has previously explained that an individual can conduct one 60-day rollover per 1-year period per IRA and thus interpreted IRC 408(d)(3)(b) to apply on a per IRA basis. This one 60-day rollover per IRA rule is explained by way of example in the current version of IRS Publication 590, page 25, as follows.

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

Based on this explanation, it is clear that the guidance from the IRS is that an individual can make one 60-day rollover per account per 1-year period. Yet, despite this publication, the IRS sought to make Mr. Bodrow’s second 60-day rollover from a separate IRA taxable as it was his second 60-day rollover in a one-year period. The IRS did not give any consideration to the fact that the second 60-day rollover was from a separate IRA (as it clearly explained in IRS Publication 590 to be acceptable).

The U.S. Tax Court agreed with the IRS and held that the limitations of IRC 408 (d)(3)(B) means that an individual can only conduct one 60-day rollover per 1-year period. After my own analysis of IRC 408 (d)(3)(B), I have to say that I agree with the Court’s opinion as the statutory language does not make a distinction between accounts but instead refers to 60-day rollovers taken per individual. Consequently, the intent of the statute is that a taxpayer can only conduct one 60-day rollover per 1-year period for all of their IRAs. Unfortunately, the error of the IRS in providing incorrect guidance does not go in favor of the taxpayer.

Based on the Court’s opinion, retirement account owners are well advised to only conduct one 60-day rollover per 1-year period. Keep in mind that you can conduct as many trustee to trustee or direct rollovers per year as you want as those transfers or rollovers result in money being sent directly to a new retirement account custodian or trustee and are not governed under the 60-day rollover rules.

As of March 18, 2014, the Bobrow case is still somewhat in limbo as there is currently a motion to reconsider filed by the taxpayer pending with the Court. Once the Court decides the motion to reconsider, the Judge will issue a final decision and after the decision is entered the taxpayer will have 90 days to appeal the Court’s ruling to the U.S. Court of Appeals for the Third Circuit. Given the significance of the Court’s ruling, I presume that the case will likely be appealed and heard by the U.S. Court of Appeals for the Third Circuit.

By: Mat Sorensen, attorney and author of The Self Directed IRA Handbook. www.sdirahandbook.com