Darcy M. Hamilton
October 2, 2014
A recent decision by the U.S. Tax Court in Bobrow v. Commissioner, T.C. Memo. 2014-21 effects the IRS’s once liberal interpretation of the tax code relating to rollovers from IRAs and poses a risk for investors unaware of this new interpretation of long-standing rules relating to IRAs.
Retirement account holders may be familiar with the rule outlined in Section 408(d)(3)(A) of the tax code which essentially provides that, unlike other distributions from an IRA, proceeds are not taxable when placed in another IRA, individual retirement annuity, or retirement plan within 60 days. This is commonly referred to as a “rollover”.
In Bobrow, the Court recognized that Congress enacted Section 408(d)(3)(A) as a way of providing employees with a measure of flexibility with regard to their retirement planning, but went on to say that Congress added Section 408(d)(3)(B), which provides that an individual is permitted to make only one such IRA to IRA rollover in a 1-year period, as a way to ensure that taxpayers did not take advantage of Section 408(d)(3)(A) to repeatedly shift nontaxable income in and out of retirement accounts.
For years, the IRS interpreted Section 408(d)(3)(A)to apply on an IRA-by-IRA basis. Accordingly, retirement account holders had the ability to conduct multiple indirect rollovers from one IRA to another, based upon the IRS’s own interpretation of the rules. However, in Bobrow, the Court determined that the plain language of Section 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.” [Emphasis added].
The IRS has announced, in Announcement 2014-15, that it intends to follow the Court’s decision in Bobrow and, as of January 1, 2015, will apply the limitation on an aggregate basis, meaning that an individual may not make an IRA to IRA rollover if he or she had made such a rollover involving any of his or her IRAs in the preceding 1-year period.
In an important footnote to the Bobrow case, supported by the IRS’s announcement, the Court made a distinction between rollovers and transferring funds directly between the trustees of IRAs. The Court indicated that transferring funds directly between trustees would not result in a distribution, since such funds are not within the direct control and use of the participant. Accordingly, to reduce the risk of exposure to penalties, if you want to transfer IRA funds from one institution to another, it may be prudent to ask the financial institutions to handle the paperwork, rather than distributing the funds directly to yourself and then transferring to another IRA.