Taxpayer’s Multiple Retirement Account Transactions Run Afoul of Rollover Restrictions, Fail to Qualify as Non-taxable

A couple seeking to move money between several individual retirement accounts found themselves pinched by the law’s strict limits for transactions that may qualify as a rollover contribution and avoid constituting taxable income. The rules’ cap on the number of rollover transactions and the time period for completing a rollover resulted in most of the couple’s transactions failing to qualify and therefore amounting to taxable income.

Alvan Bobrow had two IRAs at Fidelity Investments in 2008, and his wife had one. During that year, the couple took several distributions from their accounts and made several transfers between the accounts. For purposes of their 2008 income taxes, the couple characterized all distributions as funds properly rolled over into another qualifying account within the proper timeframe. The Internal Revenue Service, however, concluded that only some of the transactions constituted qualified repayments, while others were partial repayments and still other distributions had no qualified repayment at all.

The U.S. Tax Court agreed with the IRS. Distributions from retirement accounts are generally includable as taxable income, but Section 408(d) of the Tax Code excludes as non-taxable income amounts properly rolled over into another qualified retirement account. The code, however, also limits taxpayers to performing only one qualifying IRA or individual retirement annuity rollover during a single year. The taxpayers argued unsuccessfully that their transactions qualified for nan-taxable status because the one-rollover-contribution-per-year limit was specific to an individual account, and since each of their rollover transactions related to different accounts, the cap within Section 408(d) did not make the subsequent transactions taxable. The court, though, firmly disagreed. The clear meaning of Section 408(d)(3)(B) places a limit on one rollover per year per taxpayer, not per account. “In other words, a taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year,” the court stated. The court went on to conclude that the legislative of Section 408(d)(3)(B) supported this outcome, displaying an intent by Congress to apply the limit across all of a taxpayer’s retirement accounts.

The court also pointed out that the time limitations for qualifying as a rollover, and non-taxable status, are strict. One of the distributions from the wife’s retirement account, which would have otherwise qualified as a rollover and non-taxable, failed because the couple returned the funds to a qualified account 61 days after the distribution, missing the cutoff by one day. Section 408(d)(3)(A) requires that funds be “paid into an individual retirement account or individual retirement annuity … not later than the 60th day after … payment or distribution.”

The tax code’s rules regarding retirement account rollovers contain many detailed rules that require strict compliance if a transaction is to qualify as non-taxable income. Substantial negative tax consequences await those who do not know the rules well or else fail to work with an advisor well-versed in these rules. Before you undertake your retirement account rollover, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They can help you understand what the law allows (or does not allow) you to do, and help you craft the most tax-advantageous plan to accomplish your goals. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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