Individuals with multiple IRAs frequently used a tax-free
distribution provision falling under Section 408(d)(3)(B) of the
Internal Revenue Code to fund short-term loans. That
provision allows an individual to withdraw from an individual
retirement account ("IRA") without tax if the amount of
the withdrawal is deposited back into an IRA within 60 days, and as
long as only one such distribution was taken in a one-year
period.
Prior to the Tax Court decision in Bobrow v.
Commissioner, 2014-21 TC Memo 2014-21, the IRS interpreted
Section 408(d)(3) to mean that the tax-free distribution limitation
applied on an IRA-by-IRA basis. In other words, an individual
with multiple IRAs could take more than one tax-free distribution
in a year so long as the distributions came from different IRA
accounts.
In Bobrow, the Tax Court applied a more restrictive
interpretation of Section 408(d)(3) and held that the one-year
limitation applies to all IRAs that are maintained by an
individual. Under the facts of Bobrow, the taxpayer
had multiple IRAs and the Tax Court concluded that the
contributions to the taxpayer's IRA after the initial tax-free
distribution was an excess contribution to the IRA and that the
taxpayer was required to include the amount as income.
Because the holding in Bobrow is contrary to the prior
position of the IRS, the IRS issued Announcement 2014-15 in which
it stated that it will not apply the Bobrow interpretation
until January 1, 2015.
What to do now? Any taxpayers who were previously
unfamiliar with this strategy may continue to do so, but, beginning
on January 1, 2015, they may only do so once a year (regardless of
how many IRA accounts are maintained by the
taxpayer). Such distributions may be useful in addressing
short-term cash needs; although special care must be taken to
ensure that the taxpayer has funds to recontribute to the IRA at
the end of the 60-day period. As a result of Bobrow,
the strategy of taking short-term loans from multiple
IRAs will no longer be available after December 31,
2014.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.