One-Rollover-Per-Year Rule Applies to All of a Taxpayer’s IRAs, Not to Each Separate IRA
Feb. 13, 2014
A recent case, Alvan L. Bobrow and Elisa S. Bobrow v. Commissioner of Internal Revenue, highlights a trap for the unwary with respect to individual retirement account (IRA) rollover distributions. In general, a distribution from an individual retirement account is fully taxable as ordinary income in the year received. Distributions from an IRA to the IRA owner are not taxable if the value of the distribution is rolled over into a qualifying IRA, individual retirement annuity, or retirement plan within 60 days after the funds are received. The Internal Revenue Code contains a one-rollover-per-year rule that limits a taxpayer from performing more than one nontaxable rollover in a one-year period. A transfer directly from one IRA trustee to another IRA trustee is not considered a distribution subject to the one-rollover-per-year rule.
Prior to the decision in Bobrow, the IRS had taken the position in Publication 590 that the one-rollover-per-year rule applied separately to each IRA held by a taxpayer. Under this position, a taxpayer with multiple IRAs could make rollover distributions from multiple IRAs within a one-year period so long as there were not multiple distributions from the same IRA within the one-year period.
In Bobrow, the Tax Court reversed the guidance in Publication 590, holding that the one-
rollover-per-year rule applies to all of a taxpayer’s IRAs on an aggregate basis, not to each separate IRA. The Tax Court cited the plain language of the statute, legislative history, and prior case law to support its interpretation of the one-rollover-per-year rule. Based on the court’s decision in Bobrow, a taxpayer with multiple IRAs can make only one nontaxable rollover distribution in a one-year period, even if the taxpayer holds multiple IRAs.
The Bobrow case highlights the sometimes-overlooked one-rollover-per-year rule and also serves as a reminder that IRS publications are not binding on the IRS. Following Bobrow, owners of multiple IRAs need to be aware that multiple rollovers within a one-year period may result in taxable income.
For More Information