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IRA rollover guidance issued: IRS will follow the Tax Court

BY SALLY P. SCHREIBER, J.D.

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To settle the question of whether the limitation on rolling over one IRA per year under Sec. 408(d)(3)(B) applies to taxpayers on an aggregate basis or on an IRA-by-IRA basis, the IRS announced it will follow the Tax Court’s recent decision in Bobrow, T.C. Memo. 2014-21, applying the rule on an aggregate basis, meaning no matter how many IRAs a taxpayer has, the taxpayer is limited to one rollover per year (Announcement 2014-15)

While applying the rule on an aggregate basis had been the IRS’s litigating position in Bobrow, it contrasts with current IRS guidance found in Prop. Regs. Sec. 1.408-4(b)(4)(ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs), which provide that the limitation is applied on an IRA-by-IRA basis. The IRS also announced that it intends to withdraw the proposed regulation and issue new regulations that follow the Tax Court’s interpretation of the law and apply the limitation on an aggregate basis. It will also revise Publication 590 to the extent needed to reflect that interpretation.

Sec. 408(d)(3)(A)(i) permits a tax-free rollover of funds in a taxpayer’s IRA as long as the amount distributed to a taxpayer is paid into an IRA for the taxpayer’s benefit within 60 days, subject to the one-rollover-per-year limit of Sec. 408(d)(3)(B). The Tax Court in Bobrow held that the taxpayer, who had made more than one rollover from more than one IRA during the tax year, was taxable on the full amount of the second rollover.

Because the IRS has received comments that its new stance will require IRA trustees to change their procedures for making IRA rollovers and their IRA disclosure documents, the new rules, when they are issued, will not apply to rollovers made before Jan. 1, 2015.

The IRS noted that these new rules will not affect an IRA owner’s ability to transfer funds from one IRA trustee to another (as opposed to the taxpayer’s getting a check and making the transfer himself or herself) because those transactions are not considered rollovers under Rev. Rul. 78-406 and therefore are not subject to the one-a-year limit.      

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.