Recent Tax Court Decision Changes the IRA Game
Filed under: The Advisor's Blog
For the approximately 50 million American households who hold one or more individual retirement accounts (IRA), a recent court decision is being called a major game-changer. The Tax Court’s decision in Bobrow vs Commissioner states that taxpayers are allowed only one tax-free, 60-day rollover between IRAs per year. This will be the rule no matter how many IRAs the taxpayer holds.
The IRS has stated that it will uphold this decision, but the new rule will only apply to rollover distributions occurring after January 1, 2015. This gives IRA trustees and custodians time to make changes to their procedures without penalty.
So what does this mean for IRA holders?
- According to the Internal Revenue Code, once a taxpayer completes any tax-free IRA rollover, they cannot make another tax-free rollover using any account for the next 12 months.
- The old rule, allowing one tax-free, 60-day rollover for distributions from each IRA held by a taxpayer, will continue to apply throughout 2014. It is important to remember that the old rule limits rollovers to one per IRA. Taxpayers who need to utilize rollovers to move funds between IRAs should do so now, before the end of 2014.
- Roth conversions are counted separately from regular IRA rollovers, and are subject to a separate one-per-year rule. For example, a taxpayer could theoretically perform one tax-free IRA rollover and one Roth IRA conversion per year.
- The new ruling does not impact unlimited direct transfers between IRAs. In many cases it is safer to use the direct transfer approach in order to avoid this particular tax problem altogether.
As with any complicated tax situation, unintended consequences can lead to both financial expenses and personal worries. Therefore, it is always advised that taxpayers consult a qualified professional before attempting IRA rollovers, conversions, or any other financial maneuver. A tax professional can advise the taxpayer on recent changes to tax law, as well as suggest alternate courses of action that may be more beneficial in the long run.
