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One Means One for IRA Investors: One-Rollover-Per-Year-Rule Reinterpreted by Tax Court

IRA “One-Rollover-Per-Year-Rule” Reinterpreted by Tax Court

Until a recent ruling made by the Tax Court, it was understood by advisers and retirement experts that IRA holders could receive one yearly nontaxable rollover distribution from each IRA. (This applies only to distributions that are reinvested in an IRA within 60 days in accordance with rollover rules. It does not refer to direct transfers from one IRA to another.) IRS Publication 590, states that: “Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA.” Take note of the last four words of that sentence: from that same IRA. The IRS provides examples where more than one tax-free rollover distribution in a 365-day window is acceptable as long as the distributions are from different IRA accounts.

However in the case of Bobrow v. Commissioner, the Tax Court supplied a new interpretation of the One-Rollover-Per-Year-Rule asserting that only one IRA-to-IRA rollover may be made in any one-year period. That means the limitation now applies on an aggregate basis rather than per IRA.

Retirement experts are shocked since the Tax Court’s ruling conflicts with historical IRS guidance found in Publication 590 as allowing one annual rollover separately to each IRA an individual owns. Now the IRS states in Announcement 2014-15 that it “anticipates that it will follow the Tax Court’s interpretation… and will revise Publication 590 to the extent needed to follow that interpretation.”

The announcement does affirm, however, that the Bobrow interpretation will not be applied to any rollover that involves an IRA distribution occurring before January 1, 2015. Investors who have multiple IRAs should be extremely cautious going forward when making tax-free rollovers from IRAs and should consult with an adviser before attempting these transactions.

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