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Caution to Those with Multiple IRAs: Rollover Exception Applies Across All Accounts

Distributions from an IRA are normally taxable, but like so many things in tax law, there are exceptions. One such exception permits a taxpayer to transfer or “rollover” money from one IRA to another IRA, provided it is accomplished within 60 days of the initial distribution. There is, of course, an exception to the exception. A tax free rollover can only be performed once per year.

In the case of Bobrow v. Commissioner, the United States Tax Court had the opportunity to determine what happens when an individual with multiple IRA accounts utilizes the rollover exception multiple times in a one year period, but only once with respect to each IRA. In other words, when the Internal Revenue Code says that you can take money out of an IRA and put it into another one without causing a taxable event, does that exception apply on an individual IRA basis or can the exception only be utilized once per year regardless of the number of IRAs a taxpayer may have.

As it is not uncommon today for an individual to have more than one IRA account, this presents an interesting question. The taxpayer in this case took money out of his two IRAs and subsequently repaid the distributions within 60 days, relying upon the notion that the exception applied separately to each IRA. The IRS took the position that the exception may only be used once within a one year period, regardless of the number of IRAs an individual may have. Siding with the IRS, the Tax Court referred to the statutory language which specified that the rollover exception does not apply where an individual has already engaged in a rollover of “an IRA” within the 1 year period preceding the current rollover. Thus, the exception applies across all IRAs.

As an interesting side note, the court did reaffirm prior rulings that what an individual does with rollover funds during the 60 day rollover period is irrelevant for purposes of applying the rollover exception. Moreover, the court recognized that money is fungible, so it is not necessary that the exact funds distributed from an IRA are re-deposited into an IRA so long as the exact amount is indeed re-deposited.

Tax law can be tricky so we invite you to contact one of our tax attorneys to assist you with your tax matters.