Bobrow vs. Commissioner: 60-Day Rollover

A 2014 tax case ruling has changed the 60-day rollover rule. Until recently, you could rollover each IRA account once per calendar year without triggering a tax event and possible penalty (if < 59 ½). Mr. Bobrow, a tax attorney, rolled over several of his IRA accounts back-to-back (end of each year and then again at the start of the next year). This was a red flag to the IRS and the case went to court.

Bobrow lost the case because the court found the IRS had previously used their more generous interpretation of the 60-day rule. The court has now clarified this interpretation. The “new” 60-day IRA rollover rule is: [1] one rollover per taxpayer (not per account), and [2] only one rollover per 12 months (not calendar year). Moreover, the court pointed out taxpayers, “rely on IRS guidance at their own peril” (the court cited several examples of this reliance).

Under the old rollover rules, a taxpayer could have access to IRA funds for ~ 120 consecutive days (60 days at end of year #1 and then another rollover at the start of year #2). This process could be repeated with each IRA account continuously—a new calendar year meant a new rollover period.

Under the “new” rules (how the court now interprets rollovers), anyone who does > 1 rollover in a 12-month period will have the second one disallowed. In most cases, this means a taxable event; for some it will also mean a 10% pre-59 ½ penalty.

The one rollover per-person-per-12-month period does not apply to moves from a 401(k) to an IRA. For example, Tom quits ABC Company and receives a 401(k) check for $32,000. Within 60 days, Tom deposits the $32,000 into an IRA. There is no taxable event and the 401(k) transaction does not count as a rollover under the court’s ruling.

The court’s decision does not affect IRA account transfers or their frequency. This should never be a tax issue since account owner never receives any type of direct distribution and there is no constructive receipt.