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, even if IRS Publication 590 seem to state otherwise
For most people, IRS Publication 590 is the bible when it comes to understanding rules surrounding individual retirement accounts (IRAs) and Roth IRAs. However, as a recent Tax Court case held, not all the information contained in Publication 590 is 100% accurate.
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.
Note – Mr. Bobrow 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.
Being a tax attorney, Bobrow chose to represent himself in the Tax Court after the IRS imposed taxes on him and his wife, in light of the multiple indirect IRA rollovers he did in the year in question. Rather than simply saying that Bobrow’s serial withdrawals weren’t eligible for tax-free IRA rollover status because they came in quick succession and were nested within each other, the Tax Court suggested that in all instances taxpayers are limited to one tax-free IRA rollover per 12-month period. That broader finding conflicted with the IRS’ own guidance in its publication 590 on IRAs, which contemplates situations in which completely unrelated transactions using multiple IRAs could all qualify for tax-free IRA rollover treatment.
Around the retirement industry, it became widely accepted that even though IRS Publication 590 provided an example (you take money from IRA-1, and move it into a new IRA-3, the one year wait applies from the date of withdrawal to both IRA-1 and IRA-3. But it won’t apply to IRA-2, which wasn’t involved in that first rollover) that suggested that the 12 month indirect rollover rules applied to IRAs individuals, it was widely understood that in practice the IRS would apply the 12 month indirect rollover rules to all IRAs held by the IRA holder and, thus, limiting an individual IRA holder to one indirect rollover for all his or her IRAs in the aggregate within a 12 month period.
That being said, the decision in Bobrow is not surprising at all to any tax professional in the retirement industry. The most surprising aspect of the case if that Mr. Bobrow, a tax attorney and tax partner a highly reputable law firm, would attempt to argue this case in Tax Court. The fact that IRS Publication 590 had an example an indirect rollovers that seem to run in contrast to its position was always surprising and even more surprising was that it was never corrected by the IRS. However, tax professionals in the retirement industry as well as the IRS were generally all in agreement that the IRA indirect rollovers rules were applied to all IRAs in the aggregate in a 12 month period and not to each IRA individually. It was always understood that applying the indirect IRA rollover rules to each individual IRA would create too much room for abuse by IRA holders looking to use multiple IRA accounts as a lending platform, as well as be very difficult to administer from an IRA custodian perspective.
For more information on the IRA transfer and indirect rollover rules, please contact Adam Bergman, a tax partner with the IRA Financial Group. Mr. Bergman can be reached directly at firstname.lastname@example.org