IRA ROLLOVER RULING

STUNS ADVISORS

The Federal Tax Court recently ruled that the one IRA rollover per year rule applies to ALL of the taxpayer's IRA's rather than to each IRA separately. This ruling is in direct conflict with IRS Publication 590, the bible for IRAs.

There are two ways to move money from one IRA to another:

Transfers. The taxpayer directs that money from one IRA be directly deposited into another IRA. The taxpayer does not receive the money and the transaction is not reported to the IRS. This type of transaction is not affected by the ruling.

Rollovers. With a rollover, the taxpayer withdraws (takes possession of) the IRA funds but pays no tax on the withdrawal if the funds are returned to an IRA within 60 days. This can only be done once annually. The IRS, through their regulations and publications, has for over 20 years applied the rollover rule on a "Per-IRA" basis.

The following was still on the IRS website as of June 29, 2014:

Generally, 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. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

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.

Alvan Bobrow rolled over two distributions from his IRAs and in reliance upon the published IRS instructions asserted that they were tax free because they were done in a timely manner and involved different IRAs.

The IRS disagreed and determined that only one of the two rollovers was valid. So, Uncle Sam and Mr. Bobrow went off to court. The Tax Court, much to the surprise of all IRA experts, agreed with the IRS. The mistake cost Mr. Bobrow an additional $51,298 in income tax and a penalty of $10,260.

You can read the full details of the case here:

United States Tax Court vs. Bobrow, et al 

The bottom line is only one of Mr. Bobrow's distributions was eligible for rollover during the 12 month period. The Tax Court concluded that the Internal Revenue Code Section 408(d)(3)(B) limitation applies to all of the taxpayer's retirement accounts and that regardless of how many IRAs a person maintains, a taxpayer may make only one nontaxable rollover contribution within each one year period.

In other words, taxpayers have been operating under the impression that what is written in IRS Publication 590 is correct, but it is not.

The Bobrow case highlights an important rule that is sometimes overlooked

If conflicting information is provided in multiple sources, one must consider the hierarchy and reliability of such sources. In this case, Publication 590 is not authoritative and is not considered official guidance. The Tax Code is the more authoritative, and supersedes any other guidance in the event of conflict.

The IRS has said that it will be changing its publications; changing what they have been saying for 20 years. The IRS will implement this change for everyone beginning in 2015; except Mr. Bobrow who has to pay those taxes and penalties.

Thomas Jefferson

Thomas Jefferson would have been 271 years old this year. He was born April 13, 1743 and died on July 4, 1826, on the 50th anniversary of the signing of the Declaration of Independence.

In celebration of our nation's independence here are 10 interesting facts about the versatile Founding Father.

• Lover of Books - After Jefferson retired he sold his library of 6,500 volumes to the Library of Congress after it was ransacked by the British. 

• Economist - Jefferson learned economic theory while he spent time in France. He believed in free market policies and opposed bank notes as currency. 

• Architect - Jefferson designed the rotunda for the University of Virginia, his home in Monticello and the Virginia State Capitol. 

• Foodie - During his visit to France, Jefferson acquired a taste for the French cuisine. James Hemings accompanied Jefferson as his slave during his visit and the pair agreed that if Hemings learned how to prepare French cuisine he would be freed on his return to America. 

• Wine Snob - Jefferson had two vineyards at Monticello. He was known as a great wine expert of early America and sought to promote wine as an alternative to whiskey and cider. 

• Agriculturalist - Jefferson believed in the U.S. as an agrarian society. He was one of the first American farmers to employ crop rotation and redesigned the plow to make it more efficient. 

• Paleontologist - Jefferson was obsessed with fossils and was involved in a great debate about the mammoth that became a political cause. He even has a mammoth named after him. 

• Writer - The Thomas Jefferson Papers at the Library of Congress includes about 27,000 documents, including his extensive correspondence with key historical figures. 

• Musician - Jefferson was violinist. He used his violin to court his wife Martha Skelton. He later changed his tone and complained about music being played in the New World as being in a "state of deplorable barbarism."