One of the oddest things about tax law is the fact that often the rules and regulations are decided by the many court cases that are brought by taxpayers who didn’t follow the rulebook. This happened once again in a recent tax court case, where the Tax Court decided that people can only do one IRA rollover in any one-year period, no matter how many other IRA accounts they happen to have. Never mind that the decision directly contradicted the IRS’s own guidance in its Publication 590 and a number of private-letter rulings issued by the IRS.
Since the so-called Bobrow decision (which may be appealed), a common way to move money from one IRA account to another now has to be monitored closely. The ruling affects situations where an IRA owner takes a distribution from an IRA and then rolls those same funds over to another IRA within 60 days. So long as the same amount of money is put back into an IRA account within that time period, no taxes have to be paid on the distribution of funds (and no 10% additional penalty, if the IRA owner is under age 59 1/2). But now you WILL have to pay taxes–and the penalty, if applicable–if you try to do this again with the same or other IRAs during the same 365-day period.
Fortunately, this rule doesn’t apply to direct transfers, which is the way most professionals prefer to move money between IRA accounts. A direct transfer is exactly what it sounds like: the trustee of one IRA moves the money directly from that account into the hands of a trustee for another IRA account; that is, the money flows directly from one account to the other without the taxpayer ever touching it or putting it into his or her own checking account. Under current rules, even with the Bobrow decision, these kinds of transfers can be done all day long, all year long.
It has always been good advice to use only direct transfers to move IRA funds from one IRA to another. Now it’s even more so.
Incidentally, this once-per-year IRA rollover rule doesn’t apply to rollovers from an IRA to a Roth IRA (commonly known as a Roth IRA conversion). But most advisors prefer to handle those on a trustee-to-trustee basis anyway, to avoid confusion and potential problems with the 60-day rule. Mistakes on transfers can be costly from a tax standpoint, and the way things stand, they can’t be fixed after the fact–unless you decide to take the case to court and hope to reverse the current rule of law, which is far more costly still.
If you’d like to know more about rollover rules or if you want to discuss other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.