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New IRA rollover rules to take effect next year
SHERRY KARABIN
Legal News Reporter
Published: October 20, 2014
Most people would jump at the chance to take a loan with a 0 percent interest rate and until recently those with more than one individual retirement account (IRA) had the ability to give themselves such a loan.
As Harrington, Hoppe & Mitchell partner George P. Millich Jr. explained the rules allow people to receive funds from an IRA without paying income taxes or possibly facing an early withdrawal penalty, as long as the money received is rolled over within 60 days.
A rollover occurs when the owner of an IRA receives funds from the account and deposits them into another one that he or she owns, said Millich.
The law allows one rollover in any one-year period, however Millich said the Internal Revenue Service interpreted the one-year rule to apply to each IRA account, so an individual with several IRAs could make several rollovers without paying any penalty.
Many people had been taking advantage of this option, he said, and before the 60 days was up they would simply take money from a second IRA in another rollover and use the money received to repay the first one.
“For as long as I can remember these rules were in effect,” said Millich, who specializes in estate planning, probate administration, tax law and business succession planning. “The Internal Revenue Service allowed it so that people who may have left one job could rollover their pension to another fund. But there was a loophole in the law and it was essentially allowing people to borrow money without paying any interest or counting it toward their taxable income.”
However, as a result of a Jan. 28, 2014 U.S. Tax Court decision, he said the rules are changing.
In Bobrow v. Commissioner, the court changed the guidelines so that Internal Revenue Code Section 408(d)(3)(B), which limits rollovers to one every 12 months per IRA, will now apply to the aggregate of a person’s IRAs rather than applying to each separate IRA that a person may have, Millich said. As a result, IRA account holders will only be allowed to rollover their funds once within a 12-month period no matter how many accounts they have.
“This is a departure from the IRS’s previous position as stated in Publication 590,” said Millich.
The Bobrow case involved a husband and wife, Alvan and Elisa Bobrow, who received a series of distributions from several IRAs in 2008. In two instances, the IRAs were repaid within 60 days of distribution so the couple didn’t report them as income.
However, the court said the husband had used up his one rollover-per-year allotment with the first distribution, thus subsequent distributions taken in the same year could not be tax exempt.
“Following this decision, the IRS issued Announcement 2014-15, which reverses the previous interpretation of the one-year rule for rollovers and applies the holding in Bobrow,” said Millich.
“The decision will not affect trustee-to-trustee transfers. If a trustee is making the transfer from an IRA on your behalf you can still have this done more than once per year without incurring a penalty.
“There are still questions as to whether or not the ruling will apply to Roth IRAs.”
He said the rule change would not be implemented until Jan. 1, 2015.
“People need to familiarize themselves with this change now and unless there is a special reason, it is a good idea to refrain from handling transfers yourself and rely on trustees instead.”