In the recent case of Bobrow v. Commissioner, the U.S. Tax Court overturned a longstanding IRA rule permitting taxpayers to “roll over” multiple IRAs in a single year. The IRS had interpreted a limitation on one roll over a year to apply separately to each IRA a taxpayer may own. So the taxpayer could roll over IRA A in February, IRA B in May and IRA C in October.
The Tax Court now has rejected this interpretation, ruling that a taxpayer may roll over only a single IRA each year. Taxpayers (and their advisors) also need to understand that the year is not a calendar year, but any 365-day period. So if the taxpayer rolls over IRA A on February 1st, she cannot roll over IRA B until February 1st of the following year.
To fully understand what this means, the taxpayer needs to know the difference between a “roll over” and “trustee-to-trustee” transfers of IRAs. A roll over occurs when the taxpayer withdraws funds from her IRA and deposits them into a new or different IRA within 60 days of the withdrawal.
The taxpayer may, however, move as many IRAs as she chooses by having them transferred from institution (or “trustee”) to institution. In other words, rather than withdrawing the funds and depositing them into a new IRA within 60 days, the taxpayer directs Charles Schwab to move the IRA funds to a new IRA account at Fidelity. She can do this as often as she would like.
Given that trustee-to-trustee transfers are unrestricted, it would seem that this new limitation is not much of an impediment for taxpayers. And it shouldn’t be. However, taxpayers often withdraw funds from retirement accounts not knowing the consequences. They can be protected from having to pay taxes on the withdrawals if they deposit the funds in a new account within 60 days. Now, however, if they withdraw funds from more than one account, they will have to choose which one to protect — presumably the largest.
The other reason a taxpayer may prefer a roll over to a trustee-to-trustee transfer is that it can be a lot easier to implement. Financial institutions don’t always make it easy to transfer funds to a competitor. They may require a lot of documentation or simply be slow to implement the order.
The trap for the unwary, of course, is that many advisors know the old rule permitting multiple roll overs every year. We all now need to be aware that this rule has changed.
Margolis & Bloom, LLP, practices estate, long-term care and special needs planning in Boston, Dedham, Framingham and Woburn with a strong commitment to client service. If you have questions about these or other legal matters, do not hesitate to contact us by e-mail by clicking here or by calling us at 617.267.9700.