Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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distribution— regardless of which IRA the second distribution came from. The Tax Court has affirmed that interpretation. Bobrow et ux. , TC Memo 2014-21.

However, for rollovers prior to 2015, the IRS did not apply the rule in this strict fashion. Rather, the IRS applied the rule onan account-by-account basis:Oncean IRAowner had rolled over tax-free a distribution from one IRA into the same or another IRA, he could not, within 12 months after the date of the distribution that was rolled over, do an IRA-to-IRA rollover of any other distribution from the IRA (or either of the two IRAs) involved in the first rollover . See, e.g., IRS Publication 590 (2013) , p. 25, and Prop. Reg. § 1.408-4(b)(4)(ii) (withdrawn by the IRS 7/11/14). Under the IRS’s (now defunct) liberal interpretation of the rule, the participant could nevertheless roll over, to an IRA, a later distribution received within 12 months after the earlier distribution, provided that the later distribution came from an IRA that was not involved in the prior rollover. In Bobrow , however, the Tax Court threw out the IRS’s easy-going interpretation of the once-per-12-months rule. The Court held that there could be no IRA-to-IRA rollover of a second (or later) IRA distribution received by the same recipient within 12 months after any earlier IRA distribution that was rolled over to an IRA, regardless of whether the distributions came from different IRAs. The IRS has agreed to follow the Tax Court’s holding in Bobrow . Because the Bobrow holding represented a radical change from long-standing IRS policy, the IRS applied the “new” rule prospectively only–specifically, only to distributions received after 2014. Accordingly, effective January 1, 2015, an IRA distribution (“Distribution #2”) can NOT be rolled over to any IRA if, within 12 months prior to the date of Distribution #2, the recipient received another IRA distribution (“Distribution #1”) that was tax-free by virtue of being rolled over to an IRA (with one exception; see item #2 in the following list). IRS Announcements 2014- 15, 2014-16 IRB 973, and 2014-32, 2014-48 IRB 907. 1. It has always been, and still is, extremely easy to avoid getting caught by this rule: Direct transfers from one IRA to another are not “rollovers” and accordingly are not subject to the once-per-12-months limitation. If you wish to move money from one IRA to another, it has long been considered preferable to use direct IRA-to-IRA transfers rather than 60-day rollovers (see ¶ 2.6.01 for the difference): A direct transfer avoids not only the once- per-12-months limit but also the 60-day deadline. It is now even more important and desirable than ever to use direct transfers rather than rollovers. 2. The new rule applies to IRA distributions received after 2014. However, if the earlier distribution occurred in 2014, and the later distribution that occurs in 2015 is from a different account (one that was not involved in the first rollover) the second rollover is permitted. Effectively the new rule applies only if both distributions are received in 2015 or later; if the earlier distribution was received in 2014, the old rule applies (i.e., the second Note the following in applying this new stricter rule: