IRA Rollover Ruling Stuns Advisers and Savers
The Tax Court rules that you soon may rollover only one IRA a year
Uncle Sam’s Tax Court just ruled that the one-rollover-per-year rule applies to all of a taxpayer’s IRAs rather than to each IRA separately. And that ruling, say experts, is in direct conflict with IRS Publication 590, the bible for IRAs.
“Industry leaders, financial advisers and everyone else who handles IRAs are stunned,” said Denise Appleby, the editor and publisher of The IRA Authority.
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How to Move Money Between IRAs
According to Appleby, there are two ways to move money between IRAs: transfers and rollovers.
Transfers are not reported to the IRS and not reported on a tax return; the IRA owner never touches the money. You can do an IRA transfer as often as you like, whenever you like, Appleby said.
With IRA rollovers, the IRA owner takes the money as a distribution and has 60-days to rollover (put back) the amount in another IRA. And this, you can do only once per 12-month period, said Appleby.
According to Appleby, the IRS — through its publications and regulations — has said for at least 20 years that the rollover method applies on a “per-IRA” basis. In other words, if you had 10 IRAs, you could do 10 rollovers during the year.
Here’s the guidance found in Publication 590 , which everyone viewed as gospel:
“Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a one-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 one-year period, from the IRA into which you made the tax-free rollover.
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“The one-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.”
The IRS gave this 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 did 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 past year, rolled over, tax0free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.
The New Rule
Enter Alvan and Elisa Bobrow, who had a few IRAs.
In 2008, Alvan rolled over two distributions from his IRAs and took the position that the rollovers were valid because they were done in a timely manner, and involved different IRAs, Appleby wrote in her analysis of the court case. Alvan's position was that he had not broken any rules, as explained by the IRS in its publication for the past 20 years.
Robert Powell is a MarketWatch retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.