IRA Rollover – Only Once Per Year Says the Tax Court

February 26, 2014

In late January 2014 the Tax Court ruled, in TC 2014-21, on a case involving taxpayers who did two IRA rollovers, each from a different IRA. The Court concluded that the second IRA rollover was a taxable event because only one rollover is allowed per year. This is in stark contradiction to the IRS’ own Publication 590, which shows examples that seemingly permit doing exactly what the taxpayers did.

Taxpayers may withdraw funds out of an IRA and then, within 60 days, deposit the same amount into a different IRA. This can be done once per year, starting from the date of the withdrawal. Publication 590 cites the following example:

“You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.”

Based upon this reading, the taxpayers in the earlier mentioned case should have been in the clear, but the Court disagreed, stating that IRC 408(d)(3)(B) applies to all IRAs of an individual collectively, and not on a per-IRA basis.

Taxpayers should be forewarned – regardless of what the IRS’ own publication says, doing more than one IRA rollover within a 12-month period results in taxable income. The way around this is a direct custodian-to-custodian transfer. Because the funds do not pass through the taxpayer’s hands in direct transfers, this is not considered a rollover, pursuant to Rev. Rul. 78-406.