Tax Court Limits One IRA Rollover Per Year RestrictionApril 2014 – ERISA Alert
Individuals with multiple IRAs frequently used a tax-free distribution provision falling under Section 408(d)(3)(B) of the Internal Revenue Code to fund short-term loans. That provision allows an individual to withdraw from an individual retirement account ("IRA") without tax if the amount of the withdrawal is deposited back into an IRA within 60 days, and as long as only one such distribution was taken in a one-year period.
Prior to the Tax Court decision in Bobrow v. Commissioner, 2014-21 TC Memo 2014-21, the IRS interpreted Section 408(d)(3) to mean that the tax-free distribution limitation applied on an IRA-by-IRA basis. In other words, an individual with multiple IRAs could take more than one tax-free distribution in a year so long as the distributions came from different IRA accounts.
In Bobrow, the Tax Court applied a more restrictive interpretation of Section 408(d)(3) and held that the one-year limitation applies to all IRAs that are maintained by an individual. Under the facts of Bobrow, the taxpayer had multiple IRAs and the Tax Court concluded that the contributions to the taxpayer's IRA after the initial tax-free distribution was an excess contribution to the IRA and that the taxpayer was required to include the amount as income.
Because the holding in Bobrow is contrary to the prior position of the IRS, the IRS issued Announcement 2014-15 in which it stated that it will not apply the Bobrow interpretation until January 1, 2015.
What to do now? Any taxpayers who were previously unfamiliar with this strategy may continue to do so, but, beginning on January 1, 2015, they may only do so once a year (regardless of how many IRA accounts are maintained by the taxpayer). Such distributions may be useful in addressing short-term cash needs; although special care must be taken to ensure that the taxpayer has funds to recontribute to the IRA at the end of the 60-day period. As a result of Bobrow, the strategy of taking short-term loans from multiple IRAs will no longer be available after December 31, 2014.
For more information on this Alert or other ERISA matters, contact:
Fred R. Green at +1 212 592 5910 or [email protected]