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BoBrow v. Commissioner: New Rules for IRA Rollovers

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

June  2014 Update:

The IRS has announced they will not apply the Bobrow interpretation of § 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before January 1, 2015.

 

Original Post:

When purchasing a Medicaid Compliant Annuity with tax-qualified funds (e.g. an IRA), an applicant has two options: (1) a direct IRA transfer or (2) a 60-day IRA rollover.

 

The direct transfer consists of a plan-administrator to plan-administrator transfer.  The applicant fills out an authorization form for the transfer, and the insurance company issuing the Medicaid Compliant Annuity would essentially obtain the funds directly from the custodian company.  This process can take between two weeks to two months complete, thus delaying eligibility until the transfer is completed.

 

A 60-day rollover consists of the applicant contacting the company holding the tax-qualified funds and initiating a complete liquidation of the account without withholding any taxes.  The liquidation check is usually received within five to seven business days of the request, and as long as the funds are reinvested into the tax-qualified Medicaid Compliant Annuity within 60 days, immediate tax consequences would usually be avoided.

 

Individuals are allowed unlimited IRA transfers, and one IRA rollover per account, per year.  Or so everyone thought.

 

In Bobrow v. Commissioner, T.C. Memo 2014-21, the tax court held that the once-per-year limitation applies to all of a taxpayer’s IRA accounts: “Regardless of how many IRAs he or she maintains, a taxpayer may make only one non-taxable rollover contribution each one-year period.”  This contradicts the IRS’ interpretation of IRC § 408(d)(3)(B).  Publication 590 provides that “if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a one-year period, make a tax-free rollover of any later distribution from that same IRA.”

 

At this point in time, it is unclear as to what impact this decision will have.  Will the IRS change its approach to rollovers from multiple IRAs?  The tax court’s decision does provide a precedent that the IRS can rely on to do so.  I recommend consulting with a tax advisor before moving around IRA funds in a Medicaid or VA planning case involving an individual that owns multiple IRAs.  It may be best to space out the rollovers, or opt to use a direct transfer and bypass the issue completely.

 

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  1. Avatar Samie Rossi The Hughes Law Firm says:

    With this new decision, would the annuity company allow for the transfer of multiple IRA accounts to then fund one SPIA?

    • Avatar Dale Krause says:

      Samie,

      The ruling outlined that one IRA rollover, per individual, could be made each year. Not per account. That being said, if you opted to follow the decision, multiple IRA rollovers into one SPIA would be an issue. However, multiple IRA transfers into one SPIA would be a means of bypassing any potential issue.