IRA Rollovers: U.S. Tax Court Decrees New Rules

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Suppose you need cash for a medical emergency. You can tap your IRA, especially if you plan to repay your account.

The key is to repay the money within 60 days. In IRS jargon, that's an IRA-to-IRA rollover.

If you return the cash within 60 days, you won't owe any tax, and your ongoing IRA earnings are still tax-deferred. You can do this kind of rollover only once per year.

You used to be able to do it with every IRA you own, based on an IRS rule.

But recently the U.S. Tax Court said that no matter how many IRAs you have, you can do only one rollover a year. The IRS will apply the Court's directive starting in 2015, so there is still time to move some money around if you wish.

Should you? Here are the basics.

Say that a hypothetical Jill Wilson needs $50,000 in a few days to close a business deal. Wilson has no other liquid assets to tap. So she pulls $50,000 from her IRA on Sept. 2.

Wilson has 60 days to restore the $50,000. Until Nov. 1, she can put that $50,000 back into her IRA or another IRA she owns or a retirement plan such as a 401(k).

If Wilson meets the deadline, she won't suffer adverse tax consequences. But missing the deadline will add the $50,000 to Wilson's taxable income. And she might owe a 10% early-withdrawal penalty if he's younger than age 59-1/2.

Multiple Choice

But what if Wilson has multiple IRAs? The IRS used to allow multiple rollovers.

Say that Wilson rolled her $50,000 from an IRA at the XYZ Mutual Fund Firm to a new IRA that she created at the ABC Mutual Fund Firm. Wilson could do another rollover from an IRA she held at a third mutual fund firm -- under the old IRS rule.

But the Tax Court saw things differently when judging a dispute between the IRS and tax attorney Alvan Bobrow.

In April and June 2008, Bobrow had taken distributions from two IRAs he owned. He replaced them both within 60 days from other accounts, as the IRS required.

But the Tax Court ruled, "Regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period."

As a result, the IRS said that it will reword the rule in question and follow the one-per-year rule for all IRA-to-IRA rollovers.

The new rule won't apply to IRA distributions before 2015. So you have until year-end to initiate multiple IRA rollovers, and you should meet the 60-day test for any rollovers already underway.

Don't worry about running afoul of the Tax Court for multiple rollovers before 2015. You get into the court only by petitioning for a hearing to contest an IRS notice.

Some Exceptions

And there are legal loopholes. The new rule doesn't apply to rollovers between IRAs and employer plans such as 401(k)s. It doesn't apply to Roth IRA conversions. Nor does it apply to transfers performed by financial institutions. You can move money from one IRA to another in a direct transfer -- sometimes called a trustee-to-trustee transfer -- without ever putting the IRA money into your pocket, as many times as you want, without violating the new rule.

For those transactions, there is no limit to how often you move your money around.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

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