VIEWpoint Issue 1 | 2019
2018-2019 Tax Planning Guide
VIEWpoint Issue 2 | 2018
An individual retirement account (IRA) rollover is a popular way of retaining investment flexibility and tax benefits when switching from one IRA to another. However, a recent U.S. Tax Court decision has limited the ability to use this technique.
One of the ways an individual may make a tax-free transfer between two IRAs is by taking a distribution from one IRA and then depositing the distributed amount into a second IRA within 60 days after the distribution (an â€śIRA rolloverâ€ť). The tax law permitting such rollovers provides individuals may complete only one such rollover within a year. However, the law does not speak to whether the limitation means â€śone rollover per individualâ€ť or â€śone rollover per IRA.â€ť
Example: James has two IRAs: IRA#1 and IRA#2. In January, James rolls over IRA#1 to rollover IRA#3. In August, James rolls over IRA #2 to rollover IRA#4.
The Internal Revenue Service (IRS) had adopted the second interpretation, applying the one-year limitation on an account-by-account basis.Â Based on the above example,Â the IRS would have allowed both rollovers since, according to the IRS, an individual could complete any number of IRA rollovers in a one-year period, provided that no single IRA was rolled over more than once. This position was stated both in the IRSâ€™s Publication 590, Retirement Arrangements (IRAs), and proposed regulations.
New Interpretation of Limit
In the recent case, the Tax Court concluded that the IRSâ€™s interpretation of the rollover statute was incorrect. Thus, using the example above, the rollover of IRA#2 to IRA#4 would not be allowed since an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individualâ€™s IRAs in the preceding one-year period.
Shortly afterwards, the IRS announced that it would follow the Tax Courtâ€™s ruling. However, recognizing the Tax Courtâ€™s decision would require IRA trustees to make administrative changes, the IRS also announced that it will not apply the new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015. As a result, beginning with distributions after December 31, 2014, individuals will be permitted to make only one rollover of one IRA in any given one-year period.
Keep in mind this limit on the number of rollovers does not apply to direct transfers from one IRA trustee to another. To help understand this new interpretation of rollover limits and how it impacts your plans for IRA rollovers seek the advice of our tax advisorsÂ in Michigan, Houston or Ft. Lauderdale.
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