Reality Check

Fine Points And Open Items
But that’s not all. When the money is later put back into IRA-land to complete the second rollover, “it could create an excess contribution that’s subject to a 6% excise tax for every year it remains in the account, if it is not properly corrected by the IRA owner’s tax-filing due date plus extensions,” Appleby says.
It is an excess contribution if the amount put back, plus any other IRA contributions the client has made for the year, tops the annual IRA contribution limit. Currently that limit is $5,500, or $6,500 for clients at least age 50 by the end of the year.

It could also be considered an excess contribution if the client is not eligible to contribute to an IRA in the first place, Appleby says. Thus, if the client is over age 70 and a half and rolls the money into a traditional IRA, or if funds are rolled to a Roth IRA and the client’s income exceeds the amount permitted for making Roth contributions, the entire amount is an excess contribution, she explains.

Next, tell the client he gets one 60-day rollover per 365-day period. “It’s not per calendar year,” says Harry Rubins, an independent financial consultant with Foothill Securities in Santa Rosa, Calif. The 365-day period begins with the day the client receives the first distribution that is rolled over.

Be sure to inform clients about the types of transfers not affected by the Bobrow case, Rubins says. They may make unlimited rollovers from employer plans to IRAs and vice versa as well as unlimited direct trustee-to-trustee transfers, which many advisors greatly prefer over 60-day rollovers.

“I always tell clients there are a lot of potential problems with a 60-day rollover that can be avoided with a trustee-to-trustee transfer,” says Rubins. The Bobrow case proves his point, especially when you consider that Alvan Bobrow is a tax attorney!

There is also no limit on the number of Roth conversions and recharacterizations clients can make, Appleby adds.

In the absence of IRS guidance at the time of this writing, experts were debating whether clients get one 60-day rollover per 365-day period for their traditional IRAs and another one for their Roth IRAs. Or is it one for both?

Here’s another issue: Suppose a client has 10 IRAs with $10,000 each. Will he only be able to access $10,000 once per year with a 60-day rollover, rather than being able to access all the money if he had $100,000 in a single account?

“It’s an important question for individuals with multiple IRAs. Taxpayers sometimes need money on a short-term basis and may have no other place to get it,” says Appleby, adding, “These are the only clients who should be doing 60-day rollovers” instead of direct trustee-to-trustee transfers.
Impact On Planning

An obvious implication of the case is that 60-day rollovers must be used sparingly going forward. “That could be an issue if you have a client with multiple IRAs at multiple places that you’re trying to consolidate,” says Wichita planner Richard Stumpf, principal of Financial Benefits Inc., a comprehensive planning firm.

What about all the customer-service reps out there who don’t understand their own organization’s paperwork for a trustee-to-trustee transfer? Getting huffy and demanding a check immediately is a luxury that can no longer be afforded on impulse. Get a supervisor involved if that’s what it takes to move the money smartly, recommends Rubins, the Santa Rosa advisor.

The Bobrow case quashes an aggressive strategy that some have used to circumvent the prohibition on borrowing from an IRA. Following the Bobrows’ pattern of transactions, you can see that taking two distributions before repaying the first one, and thereafter alternating distributions and repayments, leaves IRA assets in the hands of the account owner until the last account is replenished. That gambit is fini.

Many advisors eschew 60-day rollovers and rightfully so. For such a planner, the Bobrow case’s greatest significance may be the opportunity to present oneself as an expert in the ever-changing, confusing world of retirement accounts.