IRA

Please Read Instructions Before Rolling IRAs: U.S. Tax Court Closes a Loophole in "IRA Indirect Rollover Rule"

March 10, 2014

If you or your client were thinking of rolling an IRA, you might want to read this discussion first.

As my wife will attest, I am one of those guys who hates to read instructions before building something, and since the birth of our first child, I've been building quite a few things lately. Typically, I'll be almost halfway through the build, then realize that a part was not used or something doesn't fit correctly, and I'll have to start over from the beginning.

For the sake of my son's safety, I think I've finally learned my lesson and now read the instructions first, which is what I suggest doing before rolling any of your clients' IRAs.

If you or your client were thinking of rolling an IRA, you might want to read this discussion first, especially in light of the U.S. Tax Court's recent ruling.

 

IRC Section 408(d)(3): One Rollover per 12 Months

First, remember that this discussion is only referring to indirect IRA-to-IRA rollovers in which funds are paid to the IRA owner and re-deposited within 60 days. We are NOT talking about direct transfers from one IRA provider to another IRA provider. Also, we are NOT talking about 401(k)/403(b) (or other eligible retirement plan)-to-IRA direct rollovers when a retiree elects to move money from a prior employer's plan into his/her IRA.

So, what does Internal Revenue Code (IRC) section 408(d)(3) say about indirect IRA-to-IRA rollovers? Among other things, it states that a taxpayer can process a tax-free 60-day rollover once per 12 months, and if at any time during the 12-month period another rollover is processed, the additional rollover will not receive the tax-free treatment.

Easy enough, right? Well, if you look closer at how this rule is explained in IRS Publication 590 (dated January 5, 2014), and compare that to the recent Tax Court ruling in Bobrow v. Commissioner, you'll see where things get a little messy.

 

So What's the Difference?

IRS/Publication 590: Individual Retirement Arrangements Tax Court Ruling in Bobrow Case

 

One Rollover per IRA
IRS Publication 590 (p. 25) provides an example that illustrates if you roll a portion of IRA1 into IRA2, you cannot roll any other portion from either IRA1 or IRA2 within 12 months, BUT you can still roll money from IRA3, assuming you have not had any tax-free rollovers in the past 12 months.

One Rollover per Taxpayer
The Tax Court ruled that you can roll an IRA only once per 12 months from ANY of your IRAs. So, once you roll a portion of IRA1 into IRA2, you cannot roll IRA3 (or any other IRA for that matter) within 12 months.

The IRS has yet to comment or provide insight on how they will address this rule going forward. But one thing is certain, be cautious if you're considering more than one rollover in a 12-month period. If you're one of those people that doesn't like reading instructions, you can always call Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.

Picture of Chad Goforth

Chad is currently a Manager of Regulatory Compliance in the Retirement Solutions Division at Pacific Life. Previously, he was a Senior Retirement Strategies Consultant, bringing more than 13 years of industry experience to his role and providing technical insights to our sales team and registered representatives on a variety of issues including IRAs, qualified plans, annuities, and estate planning issues.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency