The January 2014 Bobrow tax court ruling is an IRA game changer with huge ramifications for IRA owners. The tax court has ruled the once a year IRA rollover rule applies to all of someone’s individual retirement accounts and not to each separately. This ruling is stunning in that it changes the Internal Revenue Service’s long standing position in private letter rulings and IRS Publication 590 that the once a year rule applies to each IRA separately.
According to IRC Section 408(d)(3)(B) IRA owners can roll over only 1 distribution within a 1 year period, 365 days not calendar year. The 365 days starts on the day the IRA owners receives the money. Until this January 2014 court ruling it was clear the owner of IRAs could rollover each IRA separately once per year. If the owner wanted they could rollover each IRA once per year.
This a significant departure from everyone’s previous understanding thus making it prudent to only do one IRA to IRA rollover per year.
If an IRA owner needs to rollover more than one IRA account it is best to use the trustee to trustee transfer commonly referred to as a direst transfer or institution to institution transfer. These are the preferred methods to avoid tax trouble.
Is the IRS going to look back on taxpayer IRA rollovers? Unknown at this time. If they did – taxpayers who rolled over more than one IRA in a 365 day period could be required to pay the 6% penalty for excess contributions if the money was moved into another retirement account.
To avoid the above tax problems always do direct transfers. These avoid comingling IRA funds with regular “nonqualified” account funds (checking or saving account). If a rollover is coming from a 401(k) or other tax qualified plan it is common practice for the institution to send the funds to the owner. Make sure the check is made payable to “new institution FBO owner’s name” This check can be forwarded to the new institution without the comingling of funds.