The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months.
The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example:
“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.”
Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner.
Bobrow v. Commissioner
In this case Mr. Bobrow (anecdotally, a tax lawyer) did the following:
- On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1.
- On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2.
Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule.
The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.
Strangely, neither the IRS nor Mr. Bobrow appear to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations.
So What’s the Rule Now?
It’s not clear, but taxpayers who rely on the proposed regulations or Publication 590 to make multiple tax-free rollovers within a 12-month period do so at their own risk. It’s hoped that the IRS will clarify its position in the near future.
And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule.
*The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.
If you have questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
