A Surprise (and Not Friendly) IRA Rollover Ruling
A recent court case resulted in a decision regarding IRA rollovers that came as quite a surprise to many tax and financial advisors because it runs counter to the IRS' own interpretation of the tax code.
It was such a surprise that a number of advisers and experts in the field are warning taxpayers and clients to stop immediately making any rollovers out of concern that they could run afoul of this new ruling and unwittingly cost themselves a load of tax.
It is not uncommon for taxpayers to move money from one IRA to another IRA using a "rollover" technique, which if done properly is tax-free. The trick is that, where the money is withdrawn and made payable to the IRA holder (i.e., owner), it MUST be put back into another IRA within 60 days.
Anything outside those parameters causes the entire amount to be immediately taxable, no exceptions!
Further limiting the use of rollovers, the law says you can only use this technique once per year; in other words, once you do it you have to wait at least 365 days before doing it again.
In the recently announced Tax Court case, this is exactly what the taxpayers involved were doing. However, they had not done just one rollover, but multiple IRA accounts had been rolled over to new ones, although no one particular account had been rolled over more than once in a year's time.
In the taxpayer's mind, they were entirely in compliance, relying on the IRS' own material in so assuming. Among other things, IRS Publication 590 and numerous private letter rulings stated that you could do one rollover, per year, per account.
So, for example, if you had three different IRA accounts, you could do three different IRA rollovers within the same one year period as long as you didn't commingle the funds before doing so, say be rolling over one account into a second one before rolling that one into a third account, etc.
But no more – the Tax Court in its opinion stated that only one rollover PERIOD could be done in any one year time frame regardless of the number of accounts you might have. This was quite a surprise, especially since it went against even the IRS interpretation of the law.
The good news is that if you have multiple IRA accounts, this will not preclude you from moving your accounts around at will. You can still do so by making direct trustee-to-trustee transfers of your IRA money, and there is NO LIMIT on how often you do that. Frankly, this is the safest and most preferred way of moving IRA money anyway, at least among the adviser set.
So, as long as you don't touch the money and it goes directly from one trustee to another, you will have no problems. You just won't be able to personally have use of that money for up to 60 days, essentially a short-term loan, like you could before with the rollover technique.
According to the IRS, they will be revising Publication 590 with its next publication to reflect the new ruling. No doubt they have no problem following a ruling that just might raise them some revenue.
