IRA Rollover Pitfalls
For individuals with multiple IRAs, the Tax Court ruling in Bobrow v. Comm’r, T.C. Memo. 2014-21, should give pause, as it completely turns on its head the conventional wisdom under which financial advisors have been operating for years. The tax court ruled that IRA rollovers are limited to one per taxpayer, not one per IRA, for each 12-month period.
Rollovers can generally occur between traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP IRAs, 403(b) plans, and others. As summarized by the court in Bobrow, “IRC Section 408(d)(3)(A) allows a payee or distributee of an IRA distribution to exclude from gross income any amount paid or distributed from an IRA if the entire amount is subsequently paid into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which the payee or distributee receives the distribution.” In other words, the owner of an IRA can receive distribution from the IRA, but within 60 days thereof, contribute it to another qualifying IRA, without income tax consequence, as a rollover. This ability, however, is not without restrictions.
IRS Publication 590 tells us that “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.” (emphasis added). The same IRS Publication 590 provides in an example that two rollovers within 12 months are permissible as long as they were not involving the same IRAs.
However, unfortunately for the taxpayers in Bobrow v. Comm’r, T.C. Memo. 2014-21, though IRS Publication 590 stated that more than one nontaxable rollover within 12 months could be permissible, Internal Revenue Code Section 408(d)(3)(B) provides that a taxpayer may make only one nontaxable rollover contribution within each one-year period, not per IRA, but per taxpayer. The IRS’s own Publication 590 explaining this rule is wrong and should not be relied upon.
Unfortunately for the Bobrows, this was a misunderstanding that cost them more than $60,000 in tax and penalties.