Tax Court Ruling Changes Rules for IRA Rollovers

A distribution from a traditional IRA is taxable, in general. However, an exception permits a taxpayer to withdraw tax-free amounts from an IRA to the extent the funds are reinvested within 60 days in either the same IRA or another taxpayer-owned IRA. This is referred to as the rollover exception. However, a taxpayer can only roll over one IRA distribution per year.

Many taxpayers and tax advisors have followed the IRS guidance that the one-per-year rollover rule applied separately to each IRA of a taxpayer. This is consistent with an example contained in IRS Publication 590 - Individual Retirement Arrangements (IRAs) and IRS interpretation, even though conflicting statutory language would suggest this limitation should be applied, in aggregate, to all of a taxpayer's IRAs rather than individually.

Bobrow case and IRS Announcement

On January 28, 2014, the U.S. Tax Court issued its decision in the case of Alvan Bobrow, an attorney, holding that the limitation of one IRA rollover per year applies to the individual taxpayer, which would make the limitation apply collectively to all taxpayer IRAs and not to each separate IRA account. Subsequently, on March 20, 2014, the IRS released Announcement 2014-15 that changes the way the IRS will treat IRA rollovers but provides transition relief for certain IRA rollovers. In this Announcement, the IRS confirms that it will follow the "one rollover per year" rule adopted by the U.S. Tax Court beginning with IRA distributions occurring after December 31, 2014.

Suggested Action

If you are planning to rollover an IRA distribution, please consider the IRS taxation positions we've described. If you are an IRA issuer, custodian, record-keeper or other IRA provider, review the forms, disclosures and marketing materials that are currently being used in light of the IRS' position and consider whether revisions are appropriate as a result of the Bobrow case and Announcement 2014-15.

A final clarification that should be noted is that the one-year limitation on IRA rollovers does not apply to trustee-to-trustee transfers. A transfer of funds from one IRA trustee directly to another trustee is not a rollover because the transferred funds never are under the control of the IRA owner/participant.

Please contact your local Eide Bailly tax professional for assistance.

Eide Bailly's National Tax Office serves as a resource for clients to help analyze complex tax issues related to business decisions. Our professionals are committed to helping clients stay informed about tax news, developments and trends through various specialty areas, including cost segregation studies, wealth transfer, state and local taxation, international tax, tax exempt organizations and tax legislation.