U.S. Tax Court Changes IRA Rollover Rules

Flourishing Tax Principle #1:  It doesn’t pay to be too clever in your dealings with the Internal Revenue Service.

Just ask Alvan and Elisa Bobrow.  Despite Alvan’s being a tax lawyer by profession, the U.S. Tax Court ruled that Alvan and Elisa violated the spirit of the 60-day rollover rules outlined in IRS Publication 590—Individual Retirement Arrangements.  That publication says that if you take money from your IRA, you have sixty days to put it back, without incurring either a tax or a penalty.  Further, Publication 590 says that you can do that once per year (365 day period) per IRA account.  That idea was backed up by two Private Letter Rulings (PLRs) from the IRS—one in 1987, and another in 1996.  

So, Alvan thought it would be okay to take $65,064 from one of his IRA accounts, as long as he replaced it within sixty days.  Before his sixty period expired, Alvan withdrew $65,064 from another IRA and deposited it into his personal checking account, and then wrote a check for the same amount for deposit into his first IRA.  Elisa then withdrew $65,064 from her IRA and deposited the money into their joint checking account.  Then Alvin wrote a check on that account for $65,064 and deposited it into his second IRA, again within the sixty rollover window.  This all seems a little silly to me, but it seems to comply with the IRS’ previous guidance, as provided in Publication 590 and the two PLRs mentioned above.

Nevertheless, Alvan and Elisa received a letter from the IRS, disallowing Alvan’s second sixty–day rollover.  Along with the letter was a bill for unpaid taxes of$51,298.  They were also penalized $10,260 for inaccurate reporting.  Alvan and Elisa disagreed and took the IRS into Tax Court.

According to IRA guru Ed Slott, Alvan bungled his own argument in court, failing to cite Publication 590 and the PLRs.  Whether that was the reason for the court’s decision may never be known, but the court ruled against the Bobrows.  It also rewrote the sixty-day rollover rule to allow only one sixty-day rollover per taxpayer in any 365 day period, regardless of the number of IRA accounts the taxpayer has.  To reiterate:  Publication 590 currently limits sixty-day rollovers to one per 365 day period per IRA account.  Big difference.  The new rule takes effect on January 1, 2015.

The bottom line is:  It’s generally not a good idea to withdraw money from your IRA, intending to do a sixty-day rollover.   If you have any other choice in the matter, consider that first.  When transferring money from one IRA account to another, always do it as a trustee-to-trustee transfer, and never take possession of the money yourself.  Like everything else I’ve ever seen from the IRS, this new rule comes with exceptions, lots of them.  But, don’t try to be your own tax advisor, looking for loopholes the way that Alvan did.  Always seek advice from a qualified tax professional before—not after—you withdraw money from your IRA or other qualified retirement plan.  After is almost always too late.  mh


Source: Ed Slott, Financial Planning Magazine Online, IRS Issues IRA Rollover Warning, April 11, 2014.