Life and Death Planning for Retirement Benefits

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Chapter 2: Income Tax Issues 141
The IRS has agreed to follow the Tax Court’s holding in Bobrow. However,
because the Bobrow holding represented a radical change from long-standing IRS policy,
the IRS will apply the new rule prospectively only – specifically, only to distributions
received after 2014. Accordingly, effective January 1, 2015, an IRA distribution
(“Distribution #2”) can NOT be rolled over to any IRA if, within 12 months prior to the
date of Distribution #2, the recipient received another IRA distributions (“Distribution #1”)
that was tax-free by virtue of being rolled over to an IRA. IRS Announcement 2014-15,
2014-16 IRB 973 (4/14/14).
The new rule applies to distributions received after 2014, even if the first
distribution and rollover occurred prior to 2015. Thus the new rule is not that IRA-to-IRA
rollovers prior to 2015 are ignored in applying the new rule – the new rule is that a post-
2014 distribution is subject to the new rule, even if the prior rollover occurred prior to
2015, when the old rule was in effect.
The new rule can easily be avoided by using IRA-to-IRA transfers instead of 60-
day rollovers. In the case of a surviving spouse, she should “elect” to treat an inherited
IRA as her own rather than taking a distribution and rolling it over, to avoid this rule.
B. Not a calendar year test. The no-rollover period is twelve months from the date of receipt
of the first distribution. Thus it is always necessary to look back into the prior calendar
year, as well as to the current calendar year, in determining whether there has been a prior
rolled-over distribution that would prevent the rollover of a second distribution.
C. Distribution dates count, not rollover dates. The rule prevents tax-free rollover of a
distribution that occurs within 12 months of a prior distribution that was rolled over. Thus,
if Distribution #2 is received less than 12 months after Distribution #1, waiting until 12
months have elapsed since the prior rollover does not cure the problem. Similarly, there is
no prohibition against two tax-free rollovers within 12 months of each other, provided that
the distributions being rolled over did not occur within 12 months of each other.
D. Exceptions to the one-per-12-months rule. Neither a Roth conversion , nor the
“recharacterization” of an IRA or Roth IRA contribution #5), is treated as either
a distribution or a rollover for purposes of this rule. For another exception to the one-per-
year limit rule (for thwarted would-be first-time home buyers), see A). There is
an exception for distributions from a failed financial institution; see IRS Publication 590
(2009), p. 24.
The limit of one IRA-to-IRA rollover per year has no application to a direct transfer of
funds or property from one IRA custodian to another IRA custodian (IRA-to-IRA transfer; see
. In most cases, concerns about can be easily avoided by using an IRA-to-
IRA transfer rather than a rollover.
prevents the rollover into an IRA of a second distribution within 12 months
from an IRA; it does not prevent a rollover of such a second IRA distribution into some other kind
of eligible retirement plan, nor does it prevent multiple tax-free rollovers into an IRA from some
other type of plan. Thus it would appear easy to avoid by rolling the second IRA
distribution first into a QRP and then rolling it out again to another IRA shortly thereafter.