IRA Rules Change

Once upon a time you could borrow from your IRA without borrowing from your IRA. You see, there is this 60-day rollover rule that says you can take money out of your IRA and as long as you put it back within 60 days it’s as if it never happened. Many people have done this to tide them over between house closings or other times when they need a little extra cash for a short time.

The IRS had no problem with this. As long as you got the money back into an IRA within the 60 days, you could do this every year. (This wasn’t measure by calendar year, but by a year’s time passing between events.)

Not to be outdone, savvy investors took note that IRS Publications said that the once-a-year rule applied to IRAs as a whole. If you had multiple IRAs, you could take money from IRA #1, and then use the money from IRA #2 to pay back IRA #1 within 60 days. Sixty days from then, you could pay back IRA #2. Or maybe you did a 60-day rollover in December from an IRA account and paid it back. No problem there. But what if you wanted to do another 60-day rollover a few months later? As long as you did it from a different IRA account, that was okay. Not only did the IRS not mind people doing this, they even gave examples on their web site showing how to do it.

That’s all changed.

Now, because of the Bobrow v. Commissioner case, instead of being able to chain together multiple 60-day rollovers by using several IRA accounts, now only one rollover is allowed per person per year. Note that while this goes against examples published by the IRS and against a proposed formal rule they were working on, the tax court didn’t care.

If you are one of the thousands of people who have done multiple rollovers within one year sometime in your past, fear not. The IRS has promised not to apply the Bobrow interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.

Remember, this only applies to 60-day rollovers where you take possession of the money. You can still do as many Trustee-to-Trustee IRA transfers as you like within one year. This includes those going to or from an IRA and an employer retirement plan. Also, Roth conversions and recharacterizations are not affected by this ruling as they too have money go directly from one Trustee to another.

And while we don’t know for sure yet, it seems that the IRS will treat Traditional and Roth IRAs separately. Or at least that’s how it looks like they’re interpreting the rules.  

Confused? Well, with this and most tax matters it’s best to consult your tax advisor just to be sure. Even though the court’s opinion makes sense, it can still trip up people who are used to doing things the old way. Hopefully they’ll learn, because messing up could cause people to owe taxes they didn’t expect  and owe penalties that otherwise could have been avoided.

This article was published under the title "New Rules for IRA borrowing"

in the Wichita Falls Times Record News on June 18, 2014.