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Tax Attorney Learns Important Lessons About IRA Rollovers

Posted by Karen McCarthy on May 6, 2014 11:02:00 AM

IRS To Impose 1-year Waiting Period for IRA Rollovers on Aggregate Basis

A distribution from an IRA generally is not taxable to a taxpayer to the extent that the taxpayer rolls the amount over to an eligible retirement plan within 60 days.  Although the Internal Revenue Code provides that this rollover provision can only be used to avoid having to include a distribution in income once in a 12-month period, both proposed regulations and an IRS publication indicated that the 1-year waiting period was to be applied on an IRA-by-IRA basis.  In the recent decision of Bobrow V. Commissioner, T.C. Memo 2014-21, however, the Tax Court held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period.  On March 20, 2014, the IRS released Announcement 2014-15 indicating that it anticipates that it will follow the Bobrow aggregation rule.  Following Bobrow, no matter how many IRAs a taxpayer has, he or she will only be able to make one tax-free rollover in a 12 month period. 

We sat down with Karen McCarthy and Natalie Takacs of Meaden & Moore’s Personal Tax Advisory Group to discuss the Bobrow case and its implications for taxpayers with IRAs.  Takacs begins by explaining the facts of the Bobrow case: 

“The Bobrow case involved a tax attorney and his wife.  During 2008, Mr. Bobrow received two distributions in the amount of $65,000 from two different IRAs, and Mrs. Bobrow subsequently received a third distribution in the amount of $65,000 from her IRA. Both of Mr. Bobrow’s distributions were repaid (using the proceeds from the subsequent distributions) within 60 days; however, Mrs. Bobrow’s distribution was not repaid until Day 61. Mr. Bobrow had argued that the 1-year waiting period should be applied separately with respect to each IRA. The Tax Court, however, disagreed and held that the 1-year waiting period was applicable on an aggregate basis. Consequently, the Bobrows had to include Mr. Bobrow’s 2nd $65,000 distribution in income (because it occurred within 12-month of his initial rollover distribution). In addition, because Mrs. Bobrow’s distribution was not repaid within 60 days, her distribution was also taxable (and, since she was not 59-1/2, was also subject to the 10% premature withdrawal penalty).” 

“What many taxpayers may find surprising,” McCarthy comments, “is that the transactions executed by Mr. Bobrow were consistent with proposed regulations issued by the IRS and a specific example in IRS Publication 590 (“Retirement Plans”), which provided in part that “the rollover from IRA-1 . . . 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."  McCarthy continues, “But what Mr. Bobrow failed to consider is that neither proposed regulations nor IRS Publications are binding precedent.  As the Tax Court pointed out to Mr. Bobrow when it denied his motion for reconsideration, when taxpayers rely on such guidance published by the IRS, they do so ‘at their own peril.’” 

"Fortunately," Takacs adds, “the IRS has indicated that it will not apply the Bobrow interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.  This will allow time for the IRS to update its guidance and for IRA trustees to make the necessary changes to their procedures and disclosure documents.”

“Following Bobrow,” McCarthy advises, “when taxpayers need to move funds from one IRA to another, they should do so via a Trustee-to-Trustee transfer - where funds are transferred from one IRA trustee directly to another without the IRA owner’s being in receipt of the funds.  Because such a transfer is not a rollover, it therefore is not subject to the one-rollover-per-year limitation.” 

If you require assistance regarding the tax consequences of  transactions involving your retirement accounts, please contact Karen McCarthy at (216) 928-5414 or Natalie Takacs at (216) 928-5403.

Annual Tax Update

Natalie Takacs is a Senior Manager is our Personal Tax Advisory Group. With over 20 years of experience working in the areas of individual, trust, and estate and gift tax, Natalie is skilled in managing the complex tax issues and transactions that her clients encounter when making financial and business decisions.  In her free time, Natalie enjoys traveling and spending time with her family.

Topics: Tax Planning & Strategies

Karen McCarthy

Karen McCarthy

Karen McCarthy, with 25+ years of tax planning experience, is a Vice President at Meaden & Moore and the Director of the Personal Tax Advisory Group.