Case — IRA Qualified Repayment (60 Day Rollover)

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TL Case Summ

THE QUESTION

Can a taxpayer use the 60-day rollover provision to make qualified repayments of distributions from more than one IRA account in a year?

THE DISPUTE

Taxpayer Says: The rule limiting a taxpayer from performing more than one nontaxable rollover in a one-year period is specific to each IRA and does not apply across all of a taxpayer’s IRAs.

Internal Revenue Service Says: The rule limits taxpayers to one nontaxable rollover per year and applies to all IRAs owned by a taxpayer. The additional distributions are taxable.

THE LAW

From Internal Revenue Code Section 408(d): Governs distributions from qualified retirement plans.

From Internal Revenue Code Section 408(d)(1): Provides that any amount distributed from an individual retirement plan is includible in gross income by the payee or distributee.

From Internal Revenue Code Section 408(d)(3)(A): Allows a payee or distributee of an IRA distribution to exclude from gross income any amount paid or distributed from an IRA if the entire amount is subsequently paid into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which the payee or distributee receives the distribution.

From Internal Revenue Code Section 408(d)(3): Such distributions and repayments are commonly referred to as “rollover contributions.”

From Internal Revenue Code Section 408(d)(3)(B): Limits a taxpayer from performing more than one nontaxable rollover in a one-year period with regard to IRAs and individual retirement annuities.

From Internal Revenue Code Section 408(d)(3)(D): Taxpayers may also make partial rollover contributions of less than the full amount of a distribution from an IRA if any portion of those funds is paid into a qualifying retirement plan not later than the 60th day after the day of receipt of the distribution.

THE CAUSE OF THE DISPUTE

In general, when you’re under age 59-1/2 distributions from your IRA are taxable to you, and may also be subject to a 10% penalty-tax. An exception to this is the “60-day” rule, which lets you exclude all or part of the distribution from your income if you make a repayment to a qualifying IRA no later than the 60th day after you receive a distribution.

In this case, the taxpayer, a tax law attorney, owned a traditional IRA and a rollover IRA, and his wife owned a traditional IRA.

On April 14, 2008, the taxpayer took two distributions totaling $65,064 from his traditional IRA.

On June 6, 2008, the taxpayer took a $65,064 distribution from his rollover IRA.

On June 10, 2008, he transferred $65,064 from his personal checking account to the traditional IRA.

On July 31, 2008, the taxpayer’s wife took a distribution of $65,064 from her traditional IRA.

On August 4, 2008, the taxpayer transferred $65,064 from a joint account to his rollover IRA.

On September 30, 2008, the taxpayer’s wife transferred $40,000 from the joint account to her traditional IRA.

The taxpayer says all of the repayments were qualified 60-day rollovers (and therefore nontaxable) because the one-year rule only prohibits taking multiple distributions from the same IRA within one year. The taxpayer argues that the exemption can be elected yearly for each of a taxpayer’s IRAs.

The IRS says the June 10 repayment is the only qualified rollover because the taxpayer can have completed only one distribution and repayment in the one-year period beginning on April 14, 2008, regardless of the number of IRAs owned. The IRS says the remaining distributions are taxable.

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. The plain language of section 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. By its terms, the one-year limitation laid out in section 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. In other words, a taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year. Editorial Note: This contrasts with the wording in Publication 590.
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