Individuals can rollover a traditional Individual Retirement Account tax-free one time per year. Does that apply on an IRA-by-IRA basis or is it an aggregate rule?
A Tax Court decision from earlier this year answered the question and held that a taxpayer is limited to just one tax-free rollover per year on all of their IRAs combined. The agency withdrew a proposed regulation from 1981 that would have allowed the broader reading of the rule.
The Internal Revenue Service promised to follow the tax court holding and announced a new rule will take effect on January 1, 2015.
A taxpayer can complete a tax-free rollover when the amount distributed to the taxpayer is paid into another IRA within 60 days. The timing is strictly enforced. For instance, a taxpayer would owe tax on the distribution, if repayment into a rollover IRA occurred one day late.
The Tax Court found the once per year limit applied in aggregate to all the taxpayer’s IRAs. The taxpayer in the Bobrow case made several rollovers from various IRA accounts during the year. In a tax audit and later litigation, the IRS argued the amount withdrawn in the second and subsequent rollovers was taxable. The court agreed. In addition to back taxes, the court assessed a 20 percent accuracy-related penalty.
There is a difference between a transfer and rollover, however. The agency clarified that the new interpretation of the rule does not affect transfers of funds from one IRA trustee to another. The transfer is not considered a rollover or subject to the one-a-year limitation.
This case demonstrates how different application of a rule can affect the amount of tax owed. When tax litigation looms, the guidance of an experienced tax attorney is crucial.
Source: Journal of Accountancy, “One-IRA-rollover-a-year rule will be effective in 2015, says IRS,” Sally P. Schreiber, July 10, 2014.