IRA Rollover Trap

June 04, 2014

A recent IRS Announcement has created a dangerous tax trap for people using IRA Rollovers. The IRS will now follow the decision from the recent tax court case of Bobrow v. Commissioner. This decision holds that a taxpayer may make only one tax -free, 60-day rollover between IRAs within each 12-month period. The one rollover per 12 months applies regardless of the number of IRAs that the taxpayer maintains.

In a rollover, the taxpayer takes possession of funds that are moving from one IRA to another. The taxpayer has 60 days to redeposit the rollover funds into the 2nd IRA to avoid it being classified as a taxable distribution. Under the new IRS interpretation, a taxpayer who has more than one rollover within a 12-month period will have the subsequent rollovers disallowed. The disallowed rollovers will create taxable income and potential penalties.

The preferable method of moving IRA accounts is a direct trustee-to-trustee transfer. Using this type of transfer, a taxpayer with an IRA at Fidelity Investments would sign paperwork allowing their IRA to transfer directly to Charles Schwab and Co. without the taxpayer ever taking possession of the funds. There are no limits on the number of these type of transfers over any time period.

The IRS will apply this new interpretation to IRA distributions after December 31, 2014. The new announcement does not affect rollovers from 401(k)s, 403(b)s or other qualified employer plans. Going forward, extreme caution is warranted when using IRA Rollovers for any purpose. Please feel free to contact us with any questions about your IRAs.


Referrals of family, friends and colleagues who may benefit from financial planning and investment management guidance are always welcome. Thank you for recommending our firm.

This report has been prepared by West Financial Services, Inc. from original sources and data we believe to be reliable. This report is for informational purposes only and should not be construed as investment, legal or tax advice. Analysis of past market conditions may not predict future market activity.