In Announcement 2014-15 the IRS indicated that it will allow only one tax free roll-over-per-year from all of a taxpayer’s Individual Retirement Accounts (“IRA”).
Rule: Generally, Section 408(d)(1) holds any distribution from an IRA, is a taxable event subject to income tax. Section 408(d)(3)(A)(i) provides that a taxpayer who takes a distribution but returns the funds to a qualified IRA within a 60 day window is not liable for tax liability. Such transactions of distribution and subsequent re-contribution of funds to an IRA are often referred to as “Rollover Contributions.” In other words, as long as a business owner puts the money back within 60 days, she can take a distribution in cash from her IRA without paying income tax on the distribution..
Recently, the IRS won a Tax Court Case, Bobrow v. Commissioner, T.C. Memo. 2014-21, where the Court held that the exemption from taxable income of an IRA distribution was available only ONCE in a 12 month period from ALL of a taxpayers IRAs. The period of time starts with the distribution and the limitation “is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer.” Bobrow, p. 12. In the case, Mr. Bobrow, the taxpayer and a tax lawyer nonetheless, withdrew monies from multiple IRAs at different times and returned the monies within 60 days the respective IRA for each distribution. The IRS argued that taxpayer had to include all distributions after the very first distribution as taxable income. The taxpayer argued that the test for tax liability was per IRA, such that a distribution from two IRA accounts counted as two tests. The Court found that the test for liability was a distribution from any IRA that that the taxpayer owned instead viewing multiple IRAs as one pool of assets such that “a taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year.” Bobrow p. 12-13.
Application: Business owners may look to withdraw funds from their IRA to support their business. In other situation, a taxpayer might withdraw funds from an IRA to support the down payment on a home. Another, more typical situation, is where a taxpayer might look to change institutions managing or holding the assets by taking a distribution from Institution 1 and depositing in a qualifying IRA at Institution 2. If a taxpayer holds 5 IRAs, a distribution in a 12 month period from one IRA, will prevent distributions from the other 4 IRAs within a 12 month period of the distribution from the 1st IRA without triggering income tax upon distribution. If our business owner has 2 IRAs and she takes a distribution from IRA Number 1 in October of 2014, and she takes a distribution from IRA number 2 within any time before October of 2015, the second distribution will be trigger income tax liability.
Planning Implication: This may be a good reason for individuals to consolidate their IRA accounts in a case where a business owner looks to the pool of assets in their IRAs as a backup source of cash available to support the business. If a business owner owns 5 IRAs, each with $100,000, and the business owner needs $200,000 in cash for less than 60 days, she would only be able to take $100,000 tax free. If she instead had $500,000 in one IRA, she would be able to access the full $200,000 income tax free for 60 days in any 12 month period.
Good News: The new rule should not be active and live until 2015.
Taxpayers with IRAs are able to move their money between iinsitution to another institution in 2 ways and p