IRA rollovers – how many are too many?

Published on March 24, 2014

There is a long-standing IRS guideline regarding the number of IRA rollovers an individual can transact in a year, which states a limit of one tax-free IRA rollover per year. This had long been interpreted to be taken on an account-by-account basis (one tax-free rollover per IRA per year). However, the Tax Court has contradicted this by ruling that this one-rollover-per year applies to all of an individual’s IRAs collectively.

This ruling, made in late January in Bobrow v. Commisioner, contradicts what the Internal Revenue Service had published in IRS Publication 590, “Individual Retirement Arrangements.” The document 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.”

Practitioners have regarded this to mean the limitation applies to each separate retirement account (not as a whole). In other words, the IRS allows individuals to conduct one tax-free rollover during any 12-month period with any particular IRA; people with two or more IRAs could potentially make two or more tax-free rollovers during a 12-month period (one for each account).

This stance is much more beneficial to the taxpayer than what the Tax Court has ruled, which in effect has struck down the IRS guideline.

Here is the nugget of the court case: a taxpayer (Mr. Bobrow) received a distribution from his traditional IRA (IRA1) on April 14, 2008, followed by a distribution from his rollover IRA (IRA2) on June 6, 2008. Bobrow claimed that the distribution from IRA1 was repaid on June 10, 2008, and the distribution from IRA2 was repaid August 4, 2008, both within the 60-day period allowed for qualified rollovers.

The court held that the once-per-year limitation disqualified the rollover from the second IRA, concluding that the rule applies to all of a taxpayer’s IRA accounts: “Regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period.”

For people who have several IRAs, there could be tax implications that should be discussed with their accountant or tax planning specialist. There are also certain situations that may be exempt from this rule. The laws are complicated and as we have just seen, guidelines can change. If you have any questions about IRA distributions or rollovers, and the 60-day period that allows for tax-free rollovers into an IRA, our knowledgeable professionals at Next Generation Trust can provide you with answers; you may contact us at Info@NextGenerationTrust.com or call (888) 857-8058. However, since everyone’s tax situation is unique, we recommend you consult your trusted advisor about how this ruling may affect your retirement accounts.