Taxpayers may withdraw funds out of an IRA, and then within 60 days, deposit the same amount into a different IRA. This can be done once per year, starting from the date of the withdrawal. Publication 590 cites 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.
From this reading, the taxpayers should have been okay. But the Court disagreed, stating that IRC 408(d)(3)(B) applies to all IRAs of an individual collectively, and not on a per-IRA basis.
Taxpayers should thus be forewarned – regardless of what the IRS’ own publication says, doing more than one IRA rollover within a 12-month period results in taxable income. The way around this is a direct custodian to custodian transfer. Because the funds do not pass thru the taxpayer’s hands in direct transfers, this is not considered a rollover, pursuant to Rev. Rul. 78-406.
For questions or further information, please contact Aronson’s tax controversy lead partner, Laurence C. Rubin, CPA, at 301.222.8212.