Update on IRA Indirect Rollover Rule: The IRS Has Spoken

May 6, 2014

Let's look at how the IRS announcement changes the rollover landscape going forward and what you need to take into account when advising clients.

As mentioned in my previous blog post, earlier this year the U.S. Tax Court ruled that the indirect IRA-to-IRA rollover rule allowing one rollover per 12 months applies on an aggregate basis (looking at all of a particular taxpayer's IRAs). At the time, the IRS had not commented on how it would implement this rule in light of the U.S. Tax Court's decision, but the time has come.

The IRS has stated through Announcement 2014-15 that "it will follow the interpretation of Section 408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation" regardless of the ultimate resolution of Bobrow (because the case may be appealed by Mr. Bobrow).

 

What You Need to Know

So what questions do you really need to have answered after the dust settles?

  • When does this rule become effective? The IRS will not apply the Bobrow interpretation to any indirect IRA-to-IRA rollover occurring before January 1, 2015.
  • What is NOT covered by this rule? This rule DOES NOT apply to direct transfers or 401(k)/403(b) (or other eligible retirement plans)-to-IRA direct rollovers. It only applies to indirect IRA-to-IRA rollovers.
  • How will the IRS apply this rule?
    • BEFORE January 1, 2015: If a taxpayer has more than one IRA, he/she generally can process an indirect IRA-to-IRA rollover on each one within 12 months (just not more than one indirect rollover on each IRA).
    • ON or AFTER January 1, 2015: The Bobrow decision takes effect with the IRS, and a taxpayer will only be able to process an indirect IRA-to-IRA rollover once per 12 months from any IRA. This means that even if a taxpayer has multiple IRAs, if he/she processes an indirect IRA-to-IRA rollover from one IRA, this precludes him/her from being able to process an indirect IRA-to-IRA rollover from any other IRA for 12 months. Also, note that the 12-month period begins the day the taxpayer receives the IRA distribution.

Ultimately, the bottom line is that you should not advise your clients to do an indirect IRA-to-IRA rollover if they don't have to. This will lead to less tax reporting (if processing a direct transfer) and fewer headaches if the client is in a position in which he/she actually needs to consider an indirect IRA-to-IRA rollover.

If you have any additional questions, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.

Picture of Chad Goforth

Chad is currently an Attorney Consultant for the Corporate Law Department 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.

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