As we discussed in a post earlier this year, the United States Tax Court issued a decision in early 2014 which will significantly restrict the ability of IRA owners to take a distribution from an IRA with the intention of escaping tax by rolling it over to another IRA within 60 days. Code Section 408(d)(3)(B) states that the rollover exclusion does not apply to a second IRA distribution if, at any time during the 1-year period ending on the date of the second distribution, the individual received a previous IRA distribution and rolled it over into an IRA. For many years, the IRA industry believed that the “once a year” limitation applied on an IRA-by-IRA basis, and not globally to all IRAs owned by a single individual.
The Tax Court case, Bobrow v. Commissioner, held that the plain language of the statute requires that the limitation apply on an aggregate basis. Subsequently, the IRS indicated in Announcement 2014-15 that it will follow the Bobrow decision and will apply the limitation on an aggregate basis. However, and helpfully, the announcement also stated that it would not apply the aggregate limitation to distributions occurring before January 1, 2015.
The IRS recently issued Announcement 2014-32 which contains a helpful transition rule. Essentially, the Notice indicates that a distribution that occurs during 2014 can be ignored when determining whether a 2015 distribution can be rolled over, as long as the 2015 distribution is from an IRA other than one that either made or received the 2014 distribution. In other words, the aggregation rule applies to distributions from different IRAs only if each of the distributions occurs in 2015 or later.
As mentioned in our previous post, the rollover limitation only applies when a taxpayer takes a distribution from an IRA and, within 60 days, contributes it back into an IRA. It does not apply to trustee-to-trustee transfers, in which IRA funds are transferred directly from one IRA custodian to another. If taxpayers structure all of their transfers between IRAs as direct transfers between IRA trustees, they will not need to worry about the once-a-year limitation.