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Posts from the ‘Qualified Retirement Plans, 401(k), IRA, etc.’ Category

3
Apr

IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule

I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”.  I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations.  The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.

IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.

Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.

The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case.  The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period. 

The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.

What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.

You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.

 *Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.

 

 

The foregoing is provided for information purposes only.  It is not intended or designed to provide legal, accounting, tax, investment or other professional advice.  Such advice requires consideration of individual circumstances.  Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained.  JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.

 

 

 

 

 

 

 
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25
Feb

Tax Court Says One Tax-Free Rollover per Year Means Just That

   Background
The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months.

The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example:

“You have two traditional IRAs*, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.”

Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner.

Bobrow v. Commissioner
In this case Mr. Bobrow (anecdotally, a tax lawyer) did the following:

       On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1.

       On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2.

Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule.

The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.

“Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation (Internal Revenue Manual 4.10.7 issue resolution).   

“IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position” (Internal Revenue Manual 4.10.7 issue resolution).  This maybe why neither the IRS nor Mr. Bobrow appears to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations.

So what’s the rule now?
It’s not clear, but taxpayers who rely on the proposed regulations or Publication 590 to make multiple tax-free rollovers within a 12-month period do so at their own risk. It’s hoped that the IRS will clarify its position in the near future.

And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule.

*The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.

 

The foregoing is provided for information purposes only.  It is not intended or designed to provide legal, accounting, tax, investment or other professional advice.  Such advice requires consideration of individual circumstances.  Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained.  JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. 

 

 

 

 

 
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13
Mar

There’s Still Time to Contribute to an IRA for 2012

There’s still time to make a regular IRA contribution for 2012! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2012 ($6,000 if you were age 50 by December 31, 2012). For most taxpayers, the contribution deadline for 2012 is April 15, 2013.

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2012, even if your spouse didn’t have any 2012 income.

Traditional IRA
You can contribute to a traditional IRA for 2012 if you had taxable compensation and you were not age 70½ by December 31, 2012. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2012, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.

2012 income phaseout ranges for determining deductibility of traditional IRA contributions:

 1. Covered by an employer-sponsored plan and filing as:

 a. Your IRA deduction is reduced if your MAGI is:

Single/Head of household: $58,000 to $68,000

Married filing jointly: $92,000 to $112,000

Married filing separately: $0 to $10,000

 b. Your IRA deduction is eliminated if your MAGI is:

Single/Head of household: $68,000 or more

Married filing jointly$112,000 or more

Married filing separately: $10,000 or more

 2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan

a. Your IRA deduction is reduced if your MAGI is: $173,000 to $183,000

 b. Your IRA deduction is eliminated if your MAGI is: $183,000 or more

Roth IRA
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older).

For 2012, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $110,000 or less. Your maximum contribution is phased out if your income is between $110,000 and $125,000, and you can’t contribute at all if your income is $125,000 or more.

Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $173,000 or less. Your contribution is phased out if your income is between $173,000 and $183,000, and you can’t contribute at all if your income is $183,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own–other than IRAs you’ve inherited–when you calculate the taxable portion of your conversion.

Finally, keep in mind that if you make a contribution to a Roth IRA for 2012–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2012.

 
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9
Jan

New rules for 401(k), 403(b), and 457(b) in-plan Roth conversions in the American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012 (ATRA), enacted to avoid the fiscal cliff, includes a provision that may be important to certain retirement plan participants. ATRA makes it easier to make Roth conversions inside your 401(k) plan (if your plan permits).

A 401(k) in-plan Roth conversion (also called an “in-plan Roth rollover”) allows you to transfer the non-Roth portion of your 401(k) plan account (for example, your pretax contributions and company match) into a designated Roth account within the same plan. You’ll have to pay federal income tax now on the amount you convert, but qualified distributions from your Roth account in the future will be entirely income tax free. Also, the 10% early distribution penalty generally doesn’t apply to amounts you convert.

While in-plan conversions have been around since 2010, they haven’t been widely used, because they were available only if you were otherwise entitled to a distribution from your plan–for example, upon terminating employment, turning 59½, becoming disabled, or in other limited circumstances.

ATRA has eliminated the requirement that you be eligible for a distribution from the plan in order to make an in-plan conversion. Beginning in 2013, if your plan permits, you can convert any part of your traditional 401(k) plan account into a designated Roth account. The new law also applies to 403(b) and 457(b) plans that allow Roth contributions.

This provision will not be beneficial to all participates of plans the permit an in-plan Roth conversion. There are many factors to consider in deciding if it could be beneficial to you. Be sure to evaluate your current and future tax situation when making the decision.

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