Tax Court strikes a blow to IRA Rollovers

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Alan S.
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Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Mon Feb 03, 2014 2:52 pm

TC 2014-21 has concluded that the one rollover per 12 months rule does not apply separately to each IRA account, but rather to each taxpayer for all that taxpayer's IRA accounts. Pub 590 needs to be amended as it now presents an incorrect explanation of this rule.

Various schemes to borrow continuously from IRAs by establishing several IRA accounts are now risky.
See article: http://www.bna.com/tax-courts-interpret ... 179881761/ and
the case summary: http://www.ustaxcourt.gov/InOpHistoric/ ... CM.WPD.pdf

One positive for IRA owners is that the court also concedes that more than one check with the same date from a particular account is only ONE distribution.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by mnvalue » Mon Feb 03, 2014 3:20 pm

Is this one per type? Otherwise, if you have 3 inherited IRAs and a Traditional and a Roth IRA, it would take you five years to change custodians???

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Re: Tax Court strikes a blow to IRA Rollovers

Post by bsteiner » Mon Feb 03, 2014 3:25 pm

I'm not surprised at the result.

It's consistent with prior Tax Court decisions in Bidyat K. Bhattacharyya, T.C. Memo. 2007-19: http://ustaxcourt.gov/InOpHistoric/Bhat ... CM.WPD.pdf and Marshall H. Martin, T.C. Memo 1992-331: http://www.legalbitstream.com/scripts/i ... 6dd7/8/doc, and cases cited therein.

It's also consistent with Internal Revenue Code Section 408(d)(3).

Citing an IRS Publication without checking the Code, Regulations and case law is inadequate. IRS Publications are not very high in the pecking order of authority. However, if the taxpayer had cited the Publication, and hadn't called attention to the fact that he was a tax lawyer, he might have avoided the penalty. Of course, it's possible he did cite the Publication and the Tax Court didn't mention it in its decision.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by ResearchMed » Mon Feb 03, 2014 3:29 pm

mnvalue wrote:Is this one per type? Otherwise, if you have 3 inherited IRAs and a Traditional and a Roth IRA, it would take you five years to change custodians???


No.

There is no limit on DIRECT "custodian to custodian" transfers.

This applies to money (cash/check) that is received directly by the account HOLDER (person), who then has 60 days to <do whatever> before depositing it into a DIFFERENT IRA.

This is an important change, actually, in terms of access to immediate cash for emergency purposes (for those of us not subject to any penalties.

Are they looking retroactively at these rollovers? :shock:

RM

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Ged » Mon Feb 03, 2014 3:40 pm

It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Kevin M » Mon Feb 03, 2014 3:43 pm

Thanks for sharing this Alan. Important to know since rollover questions come up frequently here.

With respect to inherited IRAs, I believe trustee-to-trustee transfer is the only way to change custodians without triggering tax consequences.

I've only ever used trustee-to-trustee transfers for all IRAs to avoid the potential pitfalls of rollovers.

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Alan S.
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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Mon Feb 03, 2014 4:18 pm

While direct transfers are not affected (other that their usage may increase), and Roth IRA conversions are not affected since they specifically are exempted from the one rollover rule in the code, rollovers by type of IRA are likely limited by this decision.

In other words, you could be on shaky ground if within the same 12 months, you do both an indirect rollover from one TIRA to another TIRA and also do an indirect rollover from one Roth IRA to another Roth IRA. The Roth IRA is subject to Sec 408A, but that section incorporates 408(d)(3) unless specifically exempted such as for conversions.

bsteiner makes a good point regarding the petitioner. He was a tax lawyer and was using multiple IRA accounts including an IRA of his spouse as part of a scheme to acquire consistent use of the IRA funds. Had he just been "Joe Taxpayer" and cited Pub 590 and his advisor's opinion that the code applied per IRA account, it would likely have been different, particularly if most of his retirement savings would be deemed distributed as a result.

I doubt there is any risk to already performed rollovers for most people barring an excessive scheme of IRA borrowing, but it would be prudent to avoid such disallowed rollovers in the future. A tax return having 1099R forms from multiple IRA accounts and "rollover" on line 15b with little taxable income could become a red flag, particularly if there are other characteristics of the return that attract IRS attention.

What will be interesting is the posture that IRA custodians will take since they are in a position to detect rollover frequency violations and possibly refuse rollovers as they should also be doing if they know a rollover has been outstanding over 60 days.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by manwithnoname » Mon Feb 03, 2014 4:18 pm

Alan S. wrote:TC 2014-21 has concluded that the one rollover per 12 months rule does not apply separately to each IRA account, but rather to each taxpayer for all that taxpayer's IRA accounts. Pub 590 needs to be amended as it now presents an incorrect explanation of this rule.

Various schemes to borrow continuously from IRAs by establishing several IRA accounts are now risky.
See article: http://www.bna.com/tax-courts-interpret ... 179881761/ and
the case summary: http://www.ustaxcourt.gov/InOpHistoric/ ... CM.WPD.pdf

One positive for IRA owners is that the court also concedes that more than one check with the same date from a particular account is only ONE distribution.


It is highly unlikely that the IRS would change its current policy on IRA rollovers for the following reasons:

1. A previous case from the Tax court holding that the one rollover a year rule applied to rollovers from another IRA has been ignored by the IRS for 22 years. See Martin v. Comm. TC Memo 1992-331.

2.IRS has issued PLRs stating that rollovers from another IRA do not count under the one rollover per year rule. PLR 9308050 and 871041. IRS issued proposed reg 1.408-4(b)(4)(ii) in 1981 applying the one rollover per year to each separate IRA, not to all IRAs of a taxpayer. The proposed reg has not been revoked.

3. IRS has a policy of not changing rules based on individual cases which are decided on the facts and circumstances of each case because making such revisions to policy for all taxpayers on account of a court case would also apply when IRS loses a case as well as when it prevails. For example, IRS policy is that the personal representative of a deceased IRA owner cannot open an IRA account on behalf of the decedent because only the IRA owner can exercise such a right. However, there have been at least 2 tax court cases that have held that the IRC authorizes a personal representative to open the IRA because the IRC authorizes a personal representative to exercise all rights under the tax law that the taxpayer could exercise. IRS has refused to change its regs for over 25 years.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by manwithnoname » Mon Feb 03, 2014 4:37 pm

Alan S. wrote:While direct transfers are not affected (other that their usage may increase), and Roth IRA conversions are not affected since they specifically are exempted from the one rollover rule in the code, rollovers by type of IRA are likely limited by this decision.

In other words, you could be on shaky ground if within the same 12 months, you do both an indirect rollover from one TIRA to another TIRA and also do an indirect rollover from one Roth IRA to another Roth IRA. The Roth IRA is subject to Sec 408A, but that section incorporates 408(d)(3) unless specifically exempted such as for conversions.

bsteiner makes a good point regarding the petitioner. He was a tax lawyer and was using multiple IRA accounts including an IRA of his spouse as part of a scheme to acquire consistent use of the IRA funds. Had he just been "Joe Taxpayer" and cited Pub 590 and his advisor's opinion that the code applied per IRA account, it would likely have been different, particularly if most of his retirement savings would be deemed distributed as a result.

I doubt there is any risk to already performed rollovers for most people barring an excessive scheme of IRA borrowing, but it would be prudent to avoid such disallowed rollovers in the future. A tax return having 1099R forms from multiple IRA accounts and "rollover" on line 15b with little taxable income could become a red flag, particularly if there are other characteristics of the return that attract IRS attention.

What will be interesting is the posture that IRA custodians will take since they are in a position to detect rollover frequency violations and possibly refuse rollovers as they should also be doing if they know a rollover has been outstanding over 60 days.


What is the basis for the IRS retroactively disallowing multiple rollovers based on an isolated case when a proposed reg allowing such rollovers has been applied to all taxpayers for over 30 years? Please explain how such a change would be permitted under the APA (Administrative Procedures Act).

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Re: Tax Court strikes a blow to IRA Rollovers

Post by lazyday » Mon Feb 03, 2014 5:15 pm

Alan S. wrote:bsteiner makes a good point regarding the petitioner. He was a tax lawyer and was using multiple IRA accounts including an IRA of his spouse as part of a scheme to acquire consistent use of the IRA funds. Had he just been "Joe Taxpayer" and cited Pub 590 and his advisor's opinion that the code applied per IRA account, it would likely have been different, particularly if

Thanks bsteiner and Alan S.

I knew that IRS publications are summaries of tax law, but expect them to be adequate to stay out of trouble as an individual taxpayer. The bna article was making me think I needed to become a tax lawyer to safely do my own taxes, so appreciate the comments.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Pocket Cruiser » Mon Feb 03, 2014 5:34 pm

If tax court can, at any time, deem the IRS's own publications invalid, where are we supposed to get tax guidance from now on?

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Re: Tax Court strikes a blow to IRA Rollovers

Post by cherijoh » Mon Feb 03, 2014 10:49 pm

Hmm, this guy seemed to have been thumbing his nose at the regulations. Take money out of first IRA - not a nice round number mind you, but $65,064. A week before the 60-day deadline, remove that exact amount from a second IRA and deposit it in your taxable account. Then turn around and take that amount out of the taxable account and deposit back into first IRA, paying the money back just before the 60-day clock on the first transaction ran out. Repeat the process using your wife's IRA to repay the second rollover, again just before the clock ran out. Then make a partial repayment of the third rollover after the 60-day clock runs out and try and blame it on your IRA custodian. Oh and don't show ANY of the rollovers on your taxes even though the husband is a tax attorney. It sounds a lot like kiting checks to me.

I wonder what would have happened had it been a case where the time periods did not overlap. That is have one rollover and pay it back within 60 days. Then within a year of the first rollover, do a rollover on a different IRA account and pay it back within 60 days. If you weren't a tax professional, I think you'd have a much better case for claiming that you misinterpreted pub 590.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by ikuttath » Tue Feb 04, 2014 1:29 pm

So, I cannot do twice-a-year rollover of after tax 401(k) to roth any more?

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Re: Tax Court strikes a blow to IRA Rollovers

Post by abuss368 » Tue Feb 04, 2014 1:35 pm

This is interesting. Personally I have only ever done a direct transfer between custodians.

If my understanding is correct, there is no limit on the amount of times that can happen, based on the BNA article linked above. Only if a check is received by the IRA account holder (i.e. the 60 day limit). This clears up some confusion.
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Re: Tax Court strikes a blow to IRA Rollovers

Post by ResearchMed » Tue Feb 04, 2014 1:40 pm

abuss368 wrote:This is interesting. Personally I have only ever done a direct transfer between custodians.

If my understanding is correct, there is no limit on the amount of times that can happen? Only if a check is received by the IRA account holder (i.e. the 60 day limit).


Correct.

And our reading of the IRS "rules" did NOT have any limit on this, but the discussion here has given us pause.

There was only one time, several years ago, that we did more than one in a year, using each IRA only once - that IS important.
We just did it again - MAYBE.
That is, our IRA's are also our emergency funds (no penalty for Geezers ;-) ) so we just hopped over to Schwab, and removed the money a few weeks ago. Haven't needed to do that for years.
Not quite sure if we'll replace the money, or keep it out and pay taxes.
It's time for us to be enjoying some of this money anyway, so we might just use the "replacement money" for an extra trip :D

RM

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Tue Feb 04, 2014 2:21 pm

ikuttath wrote:So, I cannot do twice-a-year rollover of after tax 401(k) to roth any more?


The one rollover rule never did apply to rollovers between IRAs and other types of retirement accounts, regardless of whether the IRA was on the distributing or receiving end of the rollover. So you can do this as often as you like.

Roth conversions are also exempted from this rule, so you can also do unlimited numbers of Roth conversions even if you do them via 60 day rollover rather than direct transfer.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by bsteiner » Tue Feb 04, 2014 6:32 pm

Here is a link to two articles: http://www.sullcrom.com/files/Publicati ... rticle.pdf. One is by Mitchell Rogovin (who was IRS chief counsel in 1965-66), from the December 1965 issue of TAXES. The other is by Mitchell Rogovin and Donald L. Korb (who was IRS chief counsel in 2004-08, and is now at Sullivan & Cromwell, a major law firm), from the August 2009 issue of TAXES.

The pagination begins with page 21, since it's a reprint. Page 22 says (with a citation to the applicable authority) that you can't rely on a proposed regulation unless it specifically says that you can. Pages 37 and 57 say (with citations to the applicable authority) that you can't rely on an IRS Publication.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Jack » Tue Feb 04, 2014 7:32 pm

Is a roller in which the custodian sends the client a check but made out to the new custodian for the benefit of the client considered to be a direct rollover? In other words the client receives the check but never cashes the check. The client simply forwards the check to the new custodian.
Last edited by Jack on Tue Feb 04, 2014 7:34 pm, edited 1 time in total.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Kevin M » Tue Feb 04, 2014 7:34 pm

bsteiner wrote:Pages 37 and 57 say (with citations to the applicable authority) that you can't rely on an IRS Publication.

Then what's the point of having IRS Publications (for Joe Taxpayer)?

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Re: Tax Court strikes a blow to IRA Rollovers

Post by rob » Tue Feb 04, 2014 7:59 pm

Kevin M wrote:
bsteiner wrote:Pages 37 and 57 say (with citations to the applicable authority) that you can't rely on an IRS Publication.

Then what's the point of having IRS Publications (for Joe Taxpayer)?

Kevin

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Re: Tax Court strikes a blow to IRA Rollovers

Post by HueyLD » Tue Feb 04, 2014 8:11 pm

Jack wrote:Is a roller in which the custodian sends the client a check but made out to the new custodian for the benefit of the client considered to be a direct rollover? In other words the client receives the check but never cashes the check. The client simply forwards the check to the new custodian.

Jack,

That's my preferred method. I did that a couple of times in order to have a better control of the process and the 1099-R's were properly coded with a "G" code.

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Re: Tax Court strikes a blow to [abusive] IRA Rollovers

Post by livesoft » Tue Feb 04, 2014 8:13 pm

Maybe the thread title should have the word "abusive" added to it?
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Re: Tax Court strikes a blow to IRA Rollovers

Post by placeholder » Wed Feb 05, 2014 1:03 am

Kevin M wrote:Then what's the point of having IRS Publications (for Joe Taxpayer)?

Ultimately tax law as interpreted by the legal system is the final word so the pubs not reflecting the law doesn't give you an out.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by dodecahedron » Wed Feb 05, 2014 3:55 am

placeholder wrote:
Kevin M wrote:Then what's the point of having IRS Publications (for Joe Taxpayer)?

Ultimately tax law as interpreted by the legal system is the final word so the pubs not reflecting the law doesn't give you an out.


Well, it is true that if an IRS publication conflicts with the tax law, the taxpayer doesn't get "an out" (as you put it) in the sense that he is still legally required to pay the tax liability, even if an IRS publication was worded in a way that suggested he did not have any such tax liability.

However, reliance on the publications *might* get a taxpayer excused from negligence penalties, because it is generally reasonable for ordinary Americans to rely on IRS publications applicable to their situation. However, in the primary case discussed above, the taxpayer in question was a tax lawyer, and the Tax Court, quite reasonably, holds such folks to a higher standard, since they are trained to research complex issues in the statutes written by Congress, the IRS regulations, and case law precedents.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Hexdump » Wed Feb 05, 2014 7:24 am

abuss368 wrote:This is interesting. Personally I have only ever done a direct transfer between custodians.

If my understanding is correct, there is no limit on the amount of times that can happen, based on the BNA article linked above. Only if a check is received by the IRA account holder (i.e. the 60 day limit). This clears up some confusion.


It is very interesting, in that I was considering doing something along these lines in order to expedite a Vanguard to Pentagon transfer in time so as to be able to get the 3% CD.
The normal custodian to custodian would not happen quickly enough so I was considering an ACH transfer of funds from Vanguard to my PFCU IRA account.
I would never get a "check" so I wondered if it would be considered a withdrawal or rollover or what.

I never did it, as we decided to do something different but I wondered if I would have gotten crosswise with the IRS.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by kaneohe » Wed Feb 05, 2014 10:05 am

Hexdump...........I don't know the answer to your question but perhaps this datapoint might be interesting to you.
A friend of mine took advantage of PF's deal to allow folks over 59.5yo to remove most funds from existing PF IRA CD to
put in new higher APY PF IRA CD w/o early withdrawal penalty. The route the funds took was IRA CD to IRA share to
non-IRA share and then the reverse. He also got a 1099-R showing that as a withdrawal that must be reported so it was like
an indirect rollover even tho he didn't get a check and it was all done internally within one institution. A supe there claims
that is their standard procedure. Why they make you go to the non-IRA share is beyond me but perhaps that might be the clue
to your question. If they have you ACH into the IRA share , perhaps that would be different than if they have you ACH into the
non-IRA share since in the latter, you would have access to the funds as Spirit Rider comments below.

You might want to ask VG if your ACH transaction would have been reported but beware that verbal answers are suspect.
Perhaps only the computer knows what will happen.
Last edited by kaneohe on Wed Feb 05, 2014 11:49 am, edited 1 time in total.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Spirit Rider » Wed Feb 05, 2014 10:13 am

Hexdump wrote:It is very interesting, in that I was considering doing something along these lines in order to expedite a Vanguard to Pentagon transfer in time so as to be able to get the 3% CD.
The normal custodian to custodian would not happen quickly enough so I was considering an ACH transfer of funds from Vanguard to my PFCU IRA account. I would never get a "check" so I wondered if it would be considered a withdrawal or rollover or what.

I never did it, as we decided to do something different but I wondered if I would have gotten crosswise with the IRS.

It is not the manner of transfer (ACH, check), but rather whether the funds were ever in your personal possession that determines whether it is a direct transfer or rollover.

Some custodians do not do ACH transfers for direct transfers, but will cut a check made out to the destination custodian. Sometimes they will mail that check directly to the destination custodian. Other times they will mail the check to you, for you to forward to the custodian. Either would qualify as a direct transfer.

The key factor I would think is getting it coded properly. I would think by default an owner ACH transfer would be coded as a distribution by the source custodian. However, if you were able to "after the fact" to get it coded properly (since it went directly to the destination custodian and IRA account). However, I don't know if your or any other custodian would actually do this.

So this is definitely something I would verify with the custodians before attempting.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Wed Feb 05, 2014 7:06 pm

Ascensus, a major retirement plan services provider indicates issues with the tax court ruling, and will be pressing the IRS for an "official" position on this matter:
http://www.ascensus.com/CompanySite/Uti ... ewsID=1709

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Kevin M » Wed Feb 05, 2014 7:25 pm

Hexdump wrote:The normal custodian to custodian would not happen quickly enough so I was considering an ACH transfer of funds from Vanguard to my PFCU IRA account. I would never get a "check" so I wondered if it would be considered a withdrawal or rollover or what.

I'm pretty sure cannot do an ACH transfer from your Vanguard IRA account directly to an IRA at another institution. Unless you provide VG with instructions to do a trustee-to-trustee transfer, taking money out of your IRA is a distribution, and you will receive a 1099-R from Vanguard indicating that. You could then put the money into another IRA, which would then make it a rollover as long as you followed the rules.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Thu Mar 20, 2014 6:07 pm

Looks like the IRS is going down Route 2 with this:

http://www.irs.gov/pub/irs-drop/a-14-15.pdf

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sans souliers » Thu Mar 20, 2014 8:49 pm

Ged wrote:It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.


Ged, I think you've got it. People are referring to transfers when they're using the "r" word.
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Re: Tax Court strikes a blow to IRA Rollovers

Post by tfb » Thu Mar 20, 2014 9:04 pm

sans souliers wrote:
Ged wrote:It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.


Ged, I think you've got it. People are referring to transfers when they're using the "r" word.

It is a rollover when it's between a qualified plan and an IRA, or between two qualified plans, or within the same qualified plan from traditional to Roth.
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Re: Tax Court strikes a blow to IRA Rollovers

Post by manwithnoname » Thu Mar 20, 2014 9:25 pm

tfb wrote:
sans souliers wrote:
Ged wrote:It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.


Ged, I think you've got it. People are referring to transfers when they're using the "r" word.

It is a rollover when it's between a qualified plan and an IRA, or between two qualified plans, or within the same qualified plan from traditional to Roth.


Vast majority of IRA transfers wlll not be affected by the change because they are:

1. trustee to trustee transfers between IRAs

2. rollovers between IRAs and employer plans

3. rollovers of inherited IRAs, e.g., from deceased owner to spouse

4. rollovers from TIRA to Roth IRA.

5. tax free division of IRA under a divorce decree.

IRAs that are likely to be subject to the restriction are transfers from CDs in an IRA to an IRA at another financial institution which can only be accomplished by a check.

I cant remember the last time I did a rollover between 2 TIRAs.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Thu Mar 20, 2014 9:35 pm

manwithnoname wrote:I cant remember the last time I did a rollover between 2 TIRAs.

I can. My wife cleaned out an IRA in November (not 2013). I convinced her to send half back within 60 days. Then she took it back out, but by then it was the next (tax) year. It was a (partial) rollover from one custodian to the exact same custodian.

Edit: Obviously, I didn't do a rollover as it wasn't my IRA.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by bsteiner » Fri Mar 21, 2014 5:13 pm

sscritic wrote:...My wife cleaned out an IRA in November (not 2013). I convinced her to send half back within 60 days. Then she took it back out, but by then it was the next (tax) year. It was a (partial) rollover from one custodian to the exact same custodian....


You have to wait more than one year from the first distribution before you can do a second one. It's not enough to wait until the next taxable year. Internal Revenue Code Section 408(d)(3)(B).

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Re: Tax Court strikes a blow to IRA Rollovers

Post by abuss368 » Fri Mar 21, 2014 5:16 pm

There was an announcement today that the IRS will be updating their documentation and publication to agree with the tax court ruling.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by kaneohe » Fri Mar 21, 2014 5:34 pm

bsteiner wrote:
sscritic wrote:...My wife cleaned out an IRA in November (not 2013). I convinced her to send half back within 60 days. Then she took it back out, but by then it was the next (tax) year. It was a (partial) rollover from one custodian to the exact same custodian....


You have to wait more than one year from the first distribution before you can do a second one. It's not enough to wait until the next taxable year. Internal Revenue Code Section 408(d)(3)(B).


I actually started writing this same thing earlier this AM but then realized that sssc's remarks were ambiguous. I think he might have meant that returning half of the first cleanout was the (partial) rollover. The second cleanout might have been just a distribution w/o a rollover and being in the (next) tax might have been a fact but irrelevant.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by littlebird » Fri Mar 21, 2014 6:27 pm

Ged wrote:It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.


In the very early days of IRAs, I wrote a letter to the custodian of my maturing IRA CD stating that I wished to take possession of my IRA as a rollover. So they "rolled-over" my IRA to another CD. I believe I had to write to the Comptroller of the Currency to get my "roll-over" reversed. Nomenclature problem indeed. :oops:

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Fri Mar 21, 2014 7:45 pm

littlebird wrote:
Ged wrote:It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.


In the very early days of IRAs, I wrote a letter to the custodian of my maturing IRA CD stating that I wished to take possession of my IRA as a rollover. So they "rolled-over" my IRA to another CD. I believe I had to write to the Comptroller of the Currency to get my "roll-over" reversed. Nomenclature problem indeed. :oops:


Banks are going to have to do a better job under the upcoming new IRS Regs on rollovers. CD maturities are a large source of indirect rollovers as a result of many banks preference for writing a check to the IRA owner if not outright resisting direct transfers. Custodians in general do very little to underwrite the time limit eligibility for rollover contributions they are accepting and almost nothing with respect to the one rollover rule. The custodian lobbyists will be fighting the proposed IRS Regs regarding the rollover monitoring and the stakes are higher than on the 60 day time limits. That said, the IRS already has the tools with computer matching of 1099R and 5498 forms reporting distributions and corresponding rollover contributions. These forms show the individual IRA account number, so two 1099R forms with taxpayer reported rollovers on line 15b of Form 1040 become a red flag.

The IRS can extend the 60 day time limit for any reason they deem the limit to be inequitable under Sec 644 of EGTRRA. Conversely, the IRS has no such flexibility with respect to the one rollover rule. There might need to be legislation to provide the IRS will similar flexibility pursuant to the upcoming IRS Regs on this subject.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by manwithnoname » Fri Mar 21, 2014 11:37 pm

Alan S. wrote:
littlebird wrote:
Ged wrote:It's a point of nomenclature. It's called a ROLLOVER if the account holder receives the funds, a transfer if its a direct transaction between custodians.


In the very early days of IRAs, I wrote a letter to the custodian of my maturing IRA CD stating that I wished to take possession of my IRA as a rollover. So they "rolled-over" my IRA to another CD. I believe I had to write to the Comptroller of the Currency to get my "roll-over" reversed. Nomenclature problem indeed. :oops:


Banks are going to have to do a better job under the upcoming new IRS Regs on rollovers. CD maturities are a large source of indirect rollovers as a result of many banks preference for writing a check to the IRA owner if not outright resisting direct transfers. Custodians in general do very little to underwrite the time limit eligibility for rollover contributions they are accepting and almost nothing with respect to the one rollover rule. The custodian lobbyists will be fighting the proposed IRS Regs regarding the rollover monitoring and the stakes are higher than on the 60 day time limits. That said, the IRS already has the tools with computer matching of 1099R and 5498 forms reporting distributions and corresponding rollover contributions. These forms show the individual IRA account number, so two 1099R forms with taxpayer reported rollovers on line 15b of Form 1040 become a red flag.

The IRS can extend the 60 day time limit for any reason they deem the limit to be inequitable under Sec 644 of EGTRRA. Conversely, the IRS has no such flexibility with respect to the one rollover rule. There might need to be legislation to provide the IRS will similar flexibility pursuant to the upcoming IRS Regs on this subject.



Bank custodians will require anyone rolling in an IRA to sign a waiver of the banks liability for non compliance with the one rollover a year rule just as IRA custodians ask IRA owner to sign statement that they have taken their MRDs. No brainer. Another option would be for banks to develop capability to transfer cash electronically as a trustee to trustee transfer for a fee which would increase profits.

[OT comments removed by admin LadyGeek]
Last edited by manwithnoname on Sat Mar 22, 2014 7:42 am, edited 2 times in total.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Sat Mar 22, 2014 12:11 am

kaneohe wrote:
bsteiner wrote:
sscritic wrote:...My wife cleaned out an IRA in November (not 2013). I convinced her to send half back within 60 days. Then she took it back out, but by then it was the next (tax) year. It was a (partial) rollover from one custodian to the exact same custodian....


You have to wait more than one year from the first distribution before you can do a second one. It's not enough to wait until the next taxable year. Internal Revenue Code Section 408(d)(3)(B).

I actually started writing this same thing earlier this AM but then realized that sssc's remarks were ambiguous. I think he might have meant that returning half of the first cleanout was the (partial) rollover. The second cleanout might have been just a distribution w/o a rollover and being in the (next) tax might have been a fact but irrelevant.

Almost, but let's see what I wrote and whether it was ambiguous.

1) My wife cleaned out an IRA in November (not 2013). [She withdrew $100k to close on a house she was buying, let's say in 2005.]

2) I convinced her to send half back within 60 days. [I lent her $50k to send back to the same IRA custodian. Since the IRS understands that money is fungible, the money you roll over doesn't have to be the money you took out. Can you separate the money in your checking account as to source? She sent back the $50k in early January. At the end of January, 2006, she got a 1099-R showing the $100k distribution. Since we had sent $50k back, a partial, not total, rollover, I reported the $100k - $50k of income on my return 2005 return, not the $100k.]

3) She took it back out, but by then it was the next (tax) year. [Note: the antecedent of it is the half sent back within the 60 days, that being the most immediate preceding noun (days not counting, given that you can't take out days). In March, she took out the $50k she had returned and paid off the loan she had received from me. 2006 is not 2005. $50k went on my 2005 return and $50k went on my 2006 return.]

I don't see how there is another interpretation to what I wrote. As to irrelevance, I often see people recommending doing Roth conversions up to the top of your bracket. If you have $50k of space but $100k to convert, you do $50k in one year and $50k in the next. Doing $100k and paying an extra tax on the last $50k doesn't make sense to me. Well if it doesn't make sense when you take a distribution to convert to a Roth, it doesn't make sense when you take a distribution to buy a house. That seems pretty relevant to me and the money I saved by splitting the distribution over two tax years.

Maybe you can explain what I am missing in reading what I wrote. I know that many authors think they see what is not there because it was in their mind if not on the paper, but I can't see that in this case. Was it ambiguous? Was half ambiguous?

P.S. I know of no rule that says you can take two distributions within a 12 month period within the same year let alone in a period that crosses from one year to the next. I am pretty sure you can't find in my words anything about doing two rollovers. I see only one, as there was only one "send half back."
So let's look at 408(d)(3)(B). Perhaps it says you can't take a withdrawal after a rollover.
408 is IRAs.
(d) is taxation of distributions
(1) says distributions are taxable, unless
(2) says that all IRAs are one
(3) says things that meet the rules below are rollovers
(A) says that (1) doesn't apply (so not taxable) if rolled over in 60 days, (and the rule you can't send basis to your 401(k))
(B)
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.

In other words, if a distribution comes from your IRA and within the preceding year (ending on the day of receipt) you got a distribution that was not taxable because you played by the rules, then the rules don't apply to this second distribution (in time, although first in the clause), there is no exception, and the distribution is taxable. But my second distribution was taxable, I wanted it to be taxable, and I paid the tax on it. I am in the clear as far as I can tell reading as I do.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Sat Mar 22, 2014 9:01 am

I am curious as to how the IRS got it wrong in the first place.
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.

It says an IRA (for the second attempt) and then an IRA (for the first rollover), not the same IRA. An, an (not same). Who is confused?

Think about two arrests for driving an automobile while drunk, then telling the judge to go easy on you because the second automobile was not the same as the first. Good luck.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by LadyGeek » Sat Mar 22, 2014 11:41 am

I removed a number of off-topic comments which were giving opinions of the enforcement capabilities of the IRS, along with a politically biased commentary on the history of the regulations. See: Forum Policy

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Sat Mar 22, 2014 10:31 pm

It is not necessarily the second distribution that cannot be rolled over. If a taxpayer rolls over $10,000 for example and before 12 months has elapsed rolls over a later distribution of $50,000, the taxpayer would obviously rather have the $10,000 taxable than the $50,000. He can accomplish this by not treating the first distribution as a tax free rollover clearing the way for the second larger distribution to be rolled over. To accomplish this he must report the 10,000 as a taxable distribution on his return, not show a rollover, and treat the 10,000 as an excess regular contribution to the IRA that must be removed from the IRA as an excess contribution. He pays taxes only on the 10,000 and on the earnings on the 10,000 while in the IRA and also may owe a 10% penalty on the earnings distributed.

The other escape hatch a taxpayer can use who notices the problem before the second rollover is completed is to convert it to a Roth IRA and shortly thereafter recharacterize it back to a TIRA. Conversions do not count with respect to the one rollover rule and of course recharacterizations do not count because they can only be done by direct trustee transfer. This will get the funds back into a TIRA account for no cost.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Sat Mar 22, 2014 10:43 pm

Alan S.:

The law uses the phrase
received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph

If you do the $10,000 rollover and exclude it on your tax return in one year and then do the $50,000 rollover in the next year (within the 12 months), does filing an amended return including the $10,000 in the prior year's income on that amended return remove the "which was not includible"? First it wasn't, then it was.

It would seem a strict reading would not allow the second since you had indeed not included the $10,000 in your income on your original return. On the other hand, the amended return's existence could be interpreted to mean that the original return was as good as never filed and never existed.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by Alan S. » Sat Mar 22, 2014 11:42 pm

After giving this some more thought, I agree that once the first rollover is made, as long as it was rollover eligible (eg not an RMD), the taxpayer is stuck with it. If taxpayer were to take two distributions, neither of which had yet been rolled over and still within 60 days, the taxpayer could roll over the second distribution.

If the first distribution has been rolled over and eligible, it should be irrevocable once the taxpayer reports it to the custodian as a rollover contribution. The custodian will then issue the 5498 reporting a rollover contribution. So it is a rollover no matter how the taxpayer reports it on line 15, and the custodian would not process a corrective distribution unless the taxpayer misrepresented the rollover as ineligible.

Therefore, whether these distributions occur and are reported in the same year is immaterial because the taxpayer does not have this option to begin with. If the tax code provided the taxpayer with this option there would be no issue with amending a return for an open year, but there is no such option.

Therefore, the option of treating the first distribution as taxable ends once it is rolled over and reported as a rollover contribution to the custodian.

I read about the prior maneuver several years ago in some tax attorney article and failed to give it enough thought, so thanks for questioning that.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Sat Mar 22, 2014 11:52 pm

So whether it was included or not isn't the issue, it's the not includible. If it was eligible to be a rollover, then that's the end of it. It's sort of like not taking depreciation when you can or someone not claiming you as a dependent when you were in fact a dependent. It's not the action taken, but the fact that you can exclude it from your income, whether you do or not.

This may not be the most technical way of thinking about it, but it's my way of understanding.

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Re: Tax Court strikes a blow to IRA Rollovers

Post by damjam » Sun Mar 23, 2014 9:36 am

manwithnoname wrote:IRAs that are likely to be subject to the restriction are transfers from CDs in an IRA to an IRA at another financial institution which can only be accomplished by a check.

This is the situation I am concerned about.
I have several family friends that have traditional IRAs with various banks invested in CDs. One such friend mentioned she has two IRA CDs maturing this year, 3 months apart. She would like to move those IRAs to another bank. How can she accomplish that?
If my reading of the above conversation is correct, she will not be able to move both this year unless she can get the current bank to make out at least one of the checks to "New bank as trustee for damjam's friend." Is that correct?

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Sun Mar 23, 2014 10:21 am

damjam wrote:I have several family friends that have traditional IRAs with various banks invested in CDs. One such friend mentioned she has two IRA CDs maturing this year, 3 months apart. She would like to move those IRAs to another bank. How can she accomplish that?

1) She can leave the first in cash until the second matures. Then she will have double cash. Move it all in one move.
2) She can open a 3 month CD when the first matures. When the second matures, she can move it all at once.
3) She can open at 6 month CD when the first matures. She can open a 3 month CD when the second matures. When they both mature, she can move it all at once.
4) ...

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Re: Tax Court strikes a blow to IRA Rollovers

Post by sscritic » Sun Mar 23, 2014 10:41 am

damjam wrote:If my reading of the above conversation is correct, she will not be able to move both this year unless she can get the current bank to make out at least one of the checks to "New bank as trustee for damjam's friend." Is that correct?

What I remember from moving my IRA from a bank to Vanguard is that I did a direct trustee-to-trustee transfer without ever touching the money. It is recorded as Employee Asset Transfer, not as a purchase. So no, she doesn't have to get a check if the first bank and the second bank know how to talk to one another.

My memory could be bad, so perhaps the Employee Asset Transfer was in fact a check made out to Vanguard that I mailed to them, but that's not the memory I have today.

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