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Cash in on expiring IRA rollover rule

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in Small Business Tax,Small Business Tax Deduction Strategies

Earlier this year, the Tax Court determined that the once-a-year limit on tax-free rollovers applies to all of a taxpayer’s IRAs, not each one separately. This contradicted the previous taxpayer-friendly interpretation of the rules by the IRS.

Strategy: Take advantage of this tax break now. The IRS has announced that it won’t apply the new anti-taxpayer interpretation until Jan. 1, 2015.

Therefore, for the rest of the year, you’re able to roll over funds from multiple IRAs.

Here’s the whole story: Generally, you don’t have to pay any tax when you roll over funds between IRAs, as long as the rollover is completed within 60 days. You can do whatever you want with the money during the 60-day interim. What’s more, it doesn’t matter if you put the funds back in the same IRA or a different one, as long as you meet the 60-day deadline. However, if you miss the cutoff, the distribution is taxed at ordinary income tax rates reaching as high as 39.6%.

In essence, the rollover provides a 60-day interest-free loan from Uncle Sam. Is it legal? Absolutely, but the tax law limits such rollovers to one time a year.

How it works: If you roll over funds tax-free from a traditional IRA, you can’t make another tax-free rollover of a distribution from that same IRA within 365 days. Also, you can’t make a tax-free rollover of any amount distributed, within the same one-year period, from the IRA into which you made the tax-free rollover.

Although there was no legally binding authority on the issue, the IRS previously stated in Pub. 590, Individual Retirement Accounts, that this once-a-year limit applied separately to each IRA. But the Tax Court expanded the rule to cover all IRAs owned by the same taxpayer and now the IRS is going along for the ride.

Key facts: The taxpayer took distributions from two different IRAs in 2008 and redeposited the same amounts in the IRAs within 60 days of each distribution. So he figured he would not owe any tax on either rollover. But the Tax Court ruled that the once-a-year limit on IRA rollovers invalidated the second attempted rollover. As a result, the IRA owner was hit with a hefty tax bill. (Bobrow, TC Memo 2014-21)

The Court based its reasoning on its insights into Congressional intent. Of course, it didn’t take the IRS long to jump on board, despite its prior reading of the law.

However, the decision to postpone the rule change to 2015 creates a unique opportunity for taxpayers. The IRS won’t challenge multiple rollovers from separate IRAs made this year. If this idea appeals to you, go for it.

Tip: As of this writing, the IRS has yet to revise Pub. 590.

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