The IRS has indicated that it will follow the recent Tax Court decision in Bobrow v. Commissioner, which held that a taxpayer may make only one tax-free, 60 day rollover between IRAs within each 12-month period, regardless of how many IRAs he or she maintains. However, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 2015.
The Internal Revenue Code previously allowed individuals who received a distribution from an IRA to avoid tax consequences by rolling the funds over to another IRA within 60 days. The implementation of such a rollover requires the Custodian of the original IRA account to withhold 20% for taxes before sending a check to the IRA Account Holder. The Account holder then has 60 days to open a new IRA account (or make a deposit into an existing IRA account) using those funds in their entirety, meaning the proceeds they received plus the 20% that was withheld for taxes, to avoid any tax consequence. To avoid abuse of the rule, the tax code prescribes that taxpayers can only complete an IRA rollover once in a 12-month period, which the IRS in the past has interpreted to apply to IRAs on an account-by-account basis. This "separate accounts" treatment of the IRA rollover rule allowed taxpayers to potentially chain together multiple IRA rollovers, in an attempt circumvent the 1-year rule and gain "temporary" use of IRA funds for an extended period of time.
Bobrow v. Commissioner
However, the recent Tax Court case, Bobrow v. Commissioner, has shut down the separate IRAs rollover strategy altogether. In the decision, the Tax Court applied the 1-year IRA rollover rule to apply in the aggregate across all IRAs, invalidating the separate IRA rollover treatment not only for Bobrow but all taxpayers as well! In the aftermath of the Bobrow case, the IRS has now issued IRS Announcement 2014-15, stating that it will acquiesce to the Tax Court decision, update its Proposed Regulations and Publication 590, and issue new Proposed Regulations soon that will definitively apply the 1-year IRA rollover rule on an IRA-aggregated basis going forward. To allow everyone time for transition - including taxpayers in the midst of rollovers left in the lurch, and IRA custodians who must update their own processes and procedures - the IRS has declared that the "existing" rules will be allowed through the end of the year. The new rules allowing only one IRA rollover in a 1-year period will be effective starting January 1, 2015 (potentially dating back to IRA rollovers that occur in 2014).
The net results of the Bobrow case is that any distribution from any IRA invalidates subsequent IRA rollovers within a 1-year period beginning on the date that the first distribution occurs from the first IRA! If an IRA rollover occurs from one IRA, the taxpayer cannot do another rollover from that IRA or a different one either!
A very important distinction, however, is that trustee-to-trustee transfers do not count for/against this rule, as the amounts are not actually received by the taxpayer and thus aren't treated as "distributions" in the first place. In other words, if a client "transfers" their IRA to another IRA account via a trustee-to-trustee transfer this is not treated as a rollover. Consequently, multiple IRA transfers can be done through this process.
Transfers Incident to Divorce
Currently, Publication 590 states that if an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free.
The two most commonly used methods of transferring IRA assets to a spouse or former spouse are:
- Changing the name on the IRA, and
- Making a direct transfer of IRA assets
Changing the name on the IRA. If all the assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse.
Direct transfer. Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse. In effect, a trustee-to-trustee transfer.
Since both methods do not involve a "distribution" they would not be classified as a "Rollover" and would not fall under the new IRA rule.
Revisions to Publication 590
Until such time as the IRS issues their revisions to publication 590 regarding these types of transfers, caution may be warranted for divorcing clients. Special attention should be paid to how they actually implement IRA transfers to ensure that all transfers be completed trustee-to-trustee to avoid any unintended tax consequence.
Jessie Foster is a registered representative of Lincoln Financial Advisors Corp. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Advisors does not provide legal or tax advice. Divorce planning offered through unaffiliated third parties. Raskin Planning Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-904276-041514