One of the most useful, but most misunderstood, provisions of Individual Retirement Accounts is the so-called 60-day rollover rule. This allows the owner of a traditional IRA account to take money out – a “distribution” – without incurring a tax burden, as long as the money is put back into one of the owner’s IRAs within 60 days.
There has been much confusion surrounding two of the requirements that govern these rollovers.
The first is about how the 60-day grace period is calculated. The 60-day clock starts running when the account is debited, and stops when the rollover is credited. That’s the key point: the money must be actually in the account – not in the mail – when the 60 days run out. You cannot draw money from your IRA and then put a check in the mail to the IRA trustee on the 60th day. So if you ever have cash-flow needs that you could satisfy with money from an IRA, be sure to plan carefully. Leave yourself plenty of time to return it before the 60 days run out.
The other misunderstanding concerns how often you can do this. If you read IRS Publication 590, “Individual Retirement Arrangements,” you might assume that you could do a tax-free rollover from each IRA account once a year. So if you had multiple IRA accounts, you might think you could pull money out of each one, any time in the year, so long as you replenish each one within 60 days. That would, to some degree, result in the permanent ability to borrow from your retirement accounts tax-free.
This is what Alvan and Elisa Bobrow attempted to do, but in a case decided this year, the Tax Court ruled otherwise. In its decision, TC Memo 2014-14, the Tax Court ruled that each taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained. Alan Bobrow, who is a tax attorney, simply seemed to be following guidance that the IRS itself provided in its Publication 590. The Tax Court later cautioned, “Taxpayers rely on IRS guidance at their own peril.”
I would love to see the comedian Lewis Black do a routine on this statement.
The IRS manual for auditors also holds that taxpayers cannot rely on IRS sources to sustain their positions. In simple terms, an ordinary taxpayer cannot use an IRS publication to win a fight with an IRS auditor, according to the manual used to train those auditors. Presumably, the IRS will be revising Publication 590. Even so, based on what the Tax Court has said, you still will not be able to rely on it.
One important way to stay out of trouble with IRA rollovers is this: don’t do one if you don’t need to. For example, if you’re just shifting money around, but won’t be actually using it, you have better alternatives.
For example, if you are simply moving IRA funds from one institution to another, do a direct “trustee-to-trustee” transfer and don’t touch the money. This simplifies the reporting process and avoids having to keep up with the 60-day rollover rules. This also does not count against the once-a-year limit on 60-day rollovers.
If you must temporarily distribute the IRA funds to yourself, be aware of the 60-day rollover rules and be sure to fill out lines 15A and 15B on your Form 1040 to report the distribution and the taxable part. This is important, since the IRA custodian reports these distributions to the IRS on Form 1099-R, and the IRS will computer-match these reports to be sure they agree.
Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at [email protected] or 910-793-1181.
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