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Even a Tax Lawyer Can Get the IRA Rollover Rules Wrong – Part 2

By Angela Bohmann | April 1, 2014 in IRAs

I blogged recently about a tax court decision where a tax lawyer flubbed an IRA rollover, resulting in adverse tax consequences to him and his wife. An interesting aspect of the case – but one not mentioned in the decision – is that the tax lawyer’s action were consistent with the IRA rollover rules as described in IRS Publication 590.

The tax laws allow only one rollover from an IRA during any 12 month period and that rollover must be completed within 60 days. The Publication says that a rollover is permitted annually from each separate IRA. In other words, if an individual owns two separate IRAs, the individual can take a rollover from both IRAs in the same year – but not more than one rollover from any separate IRA. The tax lawyer had rolled money from one IRA to another IRA, and had also rolled money from a second IRA the same year. The tax court said that IRAs needed to be aggregated for purposes of the “one rollover a year” rule. The IRAs could not be treated separately for those purposes.

As mentioned, the tax court’s position conflicts with the IRS publication, making practitioners uncertain as to how to advise clients planning to take rollovers from multiple IRAs in a year. In an announcement released on March 20, the IRS said that it intends to issue a regulation consistent with the tax court opinion that the IRA rollover rule will apply to IRAs on an aggregated basis. Therefore, only one rollover will be allowed in a 12 month period regardless of how many IRAs an individual holds. However, the IRS also said that this new rule will not apply before January 1, 2015. This gives taxpayers some time to complete transactions that are planned or in process and also means that taxpayers will not be penalized for following the guidance in the publication.

Of course, as I mentioned in my previous blog, the IRA rollover limits can be avoided by using direct transfers where an IRA custodian works with another custodian to move an account directly from one institution to another. IRA holders who use the direct transfer approach will not run afoul of the rollover limits.