You probably assumed someone tried a fancy maneuver and the Tax Court threw the book at him. Not really. The Internal Revenue Code allows you to make a tax-free, 60-day rollover into another IRA every 12 months. This limitation has been applied individually to each IRA a taxpayer owned as instructed by rules laid out in Proposed Treasury Regulation Section 1.408-4(b)(ii) and Publication 590, Individual Retirement Arrangements.
Per Publication 590, “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 one 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.”
The IRS said, “Not anymore.” Mr. Bobrow completed two rollovers on two separate IRAs within their respective 60-day windows. He thought all was good until the IRS served him with a notice of tax deficiency. The case went to court, and the court ruled a taxpayer may only make one nontaxable, 60-day rollover between IRAs within any 12-month period, regardless of how many IRAs the taxpayer maintains. The IRS stated they will follow the Tax Court’s decision and will update Publication 590 to reflect the rule.
You’re probably wondering how this affects you. Let’s say you needed access to your money on a short-term basis for an emergency. You could work within IRS regulations to take a “loan” from your IRA using the 60-day rollover rule. You take a distribution from your IRA, but within 60 days, deposit the same amount of money into an IRA; therefore, the distribution is considered an indirect rollover. You have access to cash for 60 days or less, and generally suffer no tax consequences, provided you deposit the same amount into an IRA account.
Taking it one step further, if you had two IRAs, you could take a distribution from your second IRA, to “repay” the first IRA. This would give you another 60 days to replace the funds borrowed from the second IRA. Assuming you did so, the distribution from the second IRA would also be considered an indirect rollover. With the Bobrow decision, you can no longer do this.
Because IRA trustees and custodians need time to change their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation of the “one tax-free rollover per year” law to any rollover involving an IRA distribution that occurs before Jan. 1, 2015.
Direct transfers between IRA trustees and custodians are not subject to the one rollover per year rule. Because you never take possession of the money, it’s generally safer to use the direct transfer approach when transferring funds across accounts.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.