Recent Court Ruling Affects IRA Rollovers

Sometimes the things you think you know can lead to trouble. That’s especially true when what you think you know turns out to be wrong. For example, when taking distributions from your IRA, being wrong about the rules can lead to additional taxes and penalties.

As illustrated by a recent court case, the 60-day rollover rule is an example of an easy-to-misunderstand situation.

Generally, distributions taken from your traditional IRA are included in income in the year you receive them. Unless an exception applies, the distributions may also be subject to a 10% penalty when you’re under age 59½.

The 60-day rollover rule adds flexibility to the general tax treatment. Under this rule, as long as you replace all or part of a distribution within 60 days of receiving it, the amount repaid is not considered income and the 10% penalty does not apply. You can use the rollover rule once per year. A rollover allows you to take a short-term loan from an IRA with no tax consequences one time in a twelve-month period.

What if you have multiple IRAs? Can you use the 60-day rule for each account? Those were the questions raised in a recent Tax Court case. Based on long-standing IRS guidance, the taxpayer believed the answer was yes.

The court disagreed, saying the 60-day rule applies across all IRA accounts. No matter how many accounts you have, you can make only one nontaxable rollover per year. You can still do unlimited direct trustee-to-trustee transfers from one account to another.

In light of the decision, the IRS will issue new regulations effective January 1, 2015.

Please contact us if you plan to transfer or withdraw money from your IRA accounts. We’ll help you understand the tax consequences.