As a result of the United States Tax Court case in Bobrow v. Commissioner, the Internal Revenue Service (“IRS”) announced in IRS announcements 2014-15 and 2014-32 that a taxpayer is limited to one free tax rollover from an individual retirement account (“IRA”) per year where the individual receives the funds from said IRA and subsequently rolls these monies over within sixty days to another IRA. Prior to the Bobrow case and the IRS announcements, many taxpayers and tax advisors followed IRS guidance that allowed the one-per-year rollover rule to apply to each separate IRA of the taxpayer. Such a conclusion was consistent with an example contained in IRS Publication 590 regarding IRAs, even though there was conflicting statutory language, that appeared to support the one-per-year rule should be applied in the aggregate to all of the taxpayer’s IRAs.
In any event, pursuant to Bobrow and IRS announcements 2014-15 and 2014-32, the IRS makes it clear that beginning Jan. 1, 2015, an eligible IRA distribution received directly by the taxpayer on or after Jan. 1, 2015, and properly rolled over to another IRA within 60 days will continue to get tax free treatment. However, subsequent direct distributions to the taxpayer from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after the first IRA distribution (and rollover within 60 days) will not get tax free treatment. The reason for this rule is to prevent IRA owners from being able to access such IRAs for 60 days multiple times over in a manner that essentially amounts to an interest free loan for 60 days. In this regard, please note that Roth conversions, rollovers between qualified plans and IRAs and “trustee to trustee transfers” (direct transfers of assets from one IRA trustee to another) are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.
David Graf is a Partner in the Friday, Eldredge & Clark, LLP law firm in Little Rock. To submit a question, please contact Janet Borders at [email protected].