Individuals move assets from one retirement plan to another for a number of reasons. These can vary from account consolidation, a change in employment status, a change in the type of retirement account desired and better investment advice, to lower fees, divorce allocations and more.
Done properly, the rolled-over funds retain their tax-free status. Mistakes over how these rollovers are executed, however, can prove costly, with early-withdrawal penalties and full ordinary-income taxation of account balances possible. Sometimes, as shown in the controversial Bobrow case out of the Tax Court this past January, not even the Internal Revenue Service may be fully acquainted with all the rules.
Some taxpayers apparently have become sufficiently confused over rollovers that they are opting for the more failsafe trustee-to-trustee transfers. Often, however, additional transfer fees are assessed while straight withdrawals avoid those costs. Sometimes arranging the transfer may also require a certain amount of uncomfortable "face time" during which a representative may try to persuade the account holder to remain; a check withdrawal is considerably faster. And for others the ability to temporarily use the funds elsewhere as long as they are "paid back" into another IRA within 60 days is another reason to opt for a rollover. This article attempts to collect most of the rollover-timing rules together for consideration and possible adoption into certain strategies.
Terminology itself is sometimes an obstacle to success. The term "rollover" is often loosely used to cover two types of transfers that can have significant differences in outcome: a trustee-to-trustee transfer and a distribution/contribution to and by the account holder. For most purposes, only the latter transfer is a "rollover." A distribution of qualified plan balances (including IRAs) to an individual account-owner who then transfers them to an IRA is viewed as the account holder "rolling over" the balance from one account to another through their intermediary possession for a period of time. That period must be not more than 60 days.
60-DAY TRANSFER PERIOD
The 60-day period is applicable to transfers in which the account holder takes possession of the funds before depositing it in a new account. Thus, the 60-day period begins on the day that the account balance is debited, usually to facilitate a check presented or mailed in the form of a check payable to the owner. It ends on the day that the new IRA account is credited. A mailing rule is not applicable in determining either when the withdrawal is made or when the transfer is completed.
Likewise, in a qualified rollover, amounts distributed from a Roth IRA must be contributed either to the same or to another Roth IRA within 60 days of receiving the distribution. When a rollover spans two tax years, the taxable amounts from the traditional IRA are included in gross income in the year in which the amounts are withdrawn from the traditional IRA.
The requirement that a rollover be made within 60 days does not apply in the case of frozen deposits. There is also an exception to the 60-day deadline for failed first-time homebuyer transactions. Waivers may be granted in cases of military service in a combat zone and residence in a disaster area.
Mistakes have been made in counting or otherwise meeting the 60 days, of course. Letter rulings have been replete with situations in which missing the 60-day deadline has been excused.
These situations, which are not precedential but generally followed by the IRS, include illness, disasters, and incorrect advice by a professional. Absentmindedly forgetting about the 60-day deadline, however, usually does not sufficiently pull on the IRS's heartstrings; and, in any case, seeking a ruling requires fees to be paid and paperwork prepared.
Independent of the letter ruling process, the IRS may waive the 60-day rollover requirement if failure to waive the requirement would be "against equity or good conscience."
In the now-infamous Bobrow case (TC Memo. 2014-21), the Tax Court narrowed the going interpretation of the so-called "one-year" rule by limiting any and all nontaxable rollover transfers by an account holder to only one per one-year period. Prior to this case, the assumed rule had been that only one rollover from any single account could occur each year, whether involving a partial balance or the entire account balance.
The Tax Court found that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained. The one-year limitation under Code Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual, but instead applies to all IRAs maintained by a taxpayer, the court held. A taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year.
The Tax Court in its opinion did not mention IRS Publication 590, Individual Retirement Arrangements (IRAs), which speaks in general terms of tax-free rollovers and, in an illustration, arguably implies that a taxpayer could make more than one tax-free rollover in the scenario described. The court emphasized that the legislative history of Code Sec. 408(d)(3)(B) refers to the limitation as a limitation that applies across all of a taxpayer's retirement accounts.
The Tax Court has since rejected a motion to reconsider its holding in Bobrow. In its order, however, the Tax Court finally did explicitly address Publication 590, cautioning that, "Taxpayers rely on IRS guidance at their own peril." If the taxpayers had argued Publication 590, the argument would not have served as substantial authority for the position taken on their return, the court concluded.
In Announcement 2014-15, the IRS announced that it will issue new proposed regs and revise Publication 590 to reflect the Tax Court's decision in Bobrow. However, the new proposed regs will be prospective only, the IRS added; the old rule will continue to apply to IRA distributions occurring before Jan. 1, 2015. In rationalizing the transition for 2014, the announcement stated that the postponement was to give IRA trustees time to get new processes and disclosure documents in order. The IRS also said that it would not change its new rule regardless of the resolution of Bobrow on appeal.
The one-year limitation period does not reset during each calendar or tax year. It runs for a full 365 days (366 days if overlapping a leap-year's February 29), ending on the date of the IRA distribution being tested, rather than at the end of the 60-day period within which the recipient must redeposit the distribution into another qualified plan. The one-year period begins on the date of the IRA distribution, not on the date of the rollover.
The Tax Court in Bobrow noted that individuals who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering Code Sec. 408(d)(3))(B). Those individuals may also transfer partial balances from the same IRA using the same technique.
Since the one-year limitation period for rollovers applies to the aggregate of all qualified accounts, consolidating IRAs and other qualified retirement accounts may make sense for some people. Consolidation can take place through trustee-to-trustee transfers to more easily accommodate a withdrawal strategy under the current one-year rule. Nevertheless, it seems hardly worth the trouble in almost any case to consolidate accounts merely to be able to roll over a larger amount in the future under the 60-day rule, rather than trustee-to-trustee.
BEYOND THE 60-DAY LIMIT
Generally, individuals may roll over the entire amount of any qualified distributions received from a qualified plan into another qualified plan or IRA, including the portion of the distribution representing after-tax contributions. However, after-tax contributions to an IRA cannot be rolled over into any other type of arrangement. Further, a rollover of after-tax contributions from a qualified plan to another qualified plan must be a direct trustee-to-trustee transfer.
Rollovers are not permitted with respect to required minimum distributions (i.e., a required minimum distribution cannot be rolled back to another IRA). Rollovers from traditional IRAs to Roth IRAs are taxable.
Finally, as the Bobrow case underscores, the amount rolled over need not constitute the entire amount received from the IRA, but no further amount may be rolled over within a year.
The greatest trap arising from the 60-day limit on rollovers perhaps may be that it is too generous. Without a more immediate deadline, finishing the recontribution leg of a transfer may be put off ... and then too easily forgotten. Those wanting to "game the system" through multiple withdrawals simply to get the use of multiple account balances for up to 60 days might find a better use for their creativity. All told, the additional fee paid to effectuate a trustee-to-trustee transfer as opposed to a do-it-yourself rollover seems a premium worth paying in most cases.
For those less-sophisticated taxpayers who simply think they are just moving around their money with no harm done in connection with any rollover, however, the new interpretation of the one-year rules might in fact work to their advantage. The new rule against multiple rollovers that kicks in for 2015 on the trustee side, requiring IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, in the long run may provide those taxpayers with the most effective safeguard to date against breaking the 60-day rule.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer CCH.
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