It’s no secret that your personal finance management becomes more complex the higher your net worth climbs. As you acquire assets, whether cash, investments, real estate, retirement accounts, or anything else, you need to become aware of the ways in which you’re legally allowed to move that money around. Not only will doing so ensure that you do not incur unnecessary tax implications, but you’ll be certain that you aren’t breaking any laws while doing so. The last thing you want is to become the next Alvan Bobrow.
The Story of Alvan Bobrow
Alvan Bobrow was a prominent New York City tax attorney who, along with his wife in 2008, tried to exploit an IRA loophole. You see, he withdrew $65,000 from a traditional IRA with the intent to replace it within 60 days. As per the rules, you’re allowed to withdraw funds from a traditional IRA and, as long as the money is replaced within 60 days, it will be treated as a rollover rather than a taxable distribution.
The Bobrows’ trouble began when they took additional distributions — one more from another of Alvan’s IRA accounts and then one from his wife’s — to cover the previous distribution. Long story short, Alvan eventually found himself in front of a judge in U.S. Tax Court. He saw what he was doing as a legitimate IRA rollover but the court disagreed. Because of the court’s decision, the loophole that Alvan Bobrow tried to exploit was closed and the IRS changed the rules governing IRA rollovers.
The rule stated that a taxpayer was allowed to make just one IRA rollover every 365 days, but the loophole saw this being carried out for each IRA that the Bobrows owned.
As of the beginning of 2015, the 365 day rule still applies but encompasses all IRA accounts owned by the taxpayer. It doesn’t matter if you have one IRA account or ten, you can only do a rollover once a year. Still, there are ways to move money around to guarantee your funds are always in the most efficient place possible so that you’re able to pursue any financial goals that you set for yourself.
The Trustee Clause
In the story I just outlined, the 365 day rule applied because Mr. Bobrow and his wife were having their IRA distributions paid directly to them for the purpose of eventually rolling them over into another IRA. If they had the money distributed directly to another IRA without ever personally handling it, then that would have been what’s known as a trustee-to-trustee transfer.
In simplest terms, a trustee is a person or entity that holds property or assets on behalf of a beneficiary. It’s important to keep that in mind, because an announcement issued by the IRS following the Bobrow case clearly stated that the decision regarding the 365 day rule… “will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one- rollover-per-year limitation of § 408(d)(3)(B).” That means that trustee-to-trustee transfers can be carried out more than once a year, giving you a greater degree of flexibility when it comes to how your money is managed.
Additionally, trustee-to-trustee transfers have the advantage of being tax free, unlike rollovers, which are taxed if it takes you longer than 60 days to reposition the money.
Because IRA rollovers are now looked at so closely, it always helps to know exactly what your options are when it comes to personal finance.
This is just one of many things you want to think about when managing your retirement accounts. If you have any questions about this, or anything else involving personal finance, feel free to get in touch with me and I’ll be happy to help.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.