There are generally two ways of moving IRA funds from one IRA account to another IRA account – an IRA transfer or an indirect rollover. An IRA transfer is generally accomplished by moving IRA funds from one IRA custodian (bank) to another IRA custodian. The funds are never sent to the individual IRA holder. Whereas, in the case of an IRA indirect rollover, the IRA funds are requested by the IRA holder and are actually sent to the IRA holder by the IRA custodian as a distribution. The IRA holder than has sixty (60) days to roll those IRA funds into an IRA or 401(k) Plan account and this indirect rollover can only be done once every 12 months. If the IRA holder fails to deposit all the IR funds he/she received as part of the indirect rollover, then those funds would be subject to income tax and a 10% early distribution penalty if the individual was under the age of 591/2.
The retirement industry and IRS were generally in agreement that the one indirect rollover rule per 12-month period applies to all IRAs in the aggregate and not to each IRA account opened, even if IRS Publication 590 seem to state otherwise in an example.
In Bobrow Vs. Commissioner, TC Memo, 2014-21, a U.S. Tax Court case, tax attorney Alvan Bobrow took $65,000 out of his traditional IRA account, intending to replace that money within 60 days, as the tax law states, in order to have the transaction treated as an IRA rollover rather than a taxable distribution.
The problem, though, is that right before Bobrow repaid the $65,000 to his traditional IRA account, he took $65,000 out of a different IRA account. Then, just before the 60-day period for that withdrawal expired, Bobrow’s wife took $65,000 out of her traditional IRA, with a $65,000 repayment to Bobrow’s second IRA account taking place just days later. Eventually, the Bobrows repaid the wife’s IRA withdrawal and took the position that all of the transactions were tax-free IRA rollovers. The IRS disagreed, arguing in part that the nested withdrawals and repayments didn’t line up the way the Bobrows contended.
Mr. Bobrow, like most people could have completed the transfer of funds without doing an indirect rollover, but simply doing an IRA transfer between institutions, which has no annual limitation on the number of IRA transfers that can be done in a year. In fact, the IRA transfer is the far more popular approach to moving IRA funds between custodians. In general, one would only do an indirect rollover if she/she needed use of those funds for a short period of time (under 60 days). Hence, the Bobrow case does not have much impact on most IRA holders since IRA funds are generally transferred between IRA custodians and there are no limits on the number of IRA transfers that can be done in any time period.
For more information on the Impact of the Bobrow case on IRA transfers and indirect rollovers, please contact a tax professional at the IRA Financial Group at 800-472-0646