Interesting things are happening in the courts with regard to retirement plans, specifically 60-day IRA rollovers and inherited IRAs in bankruptcy.
60-Day Rollovers
In a recent court case, the Tax Court decided that neither the IRS nor the plaintiffs, the Bobrows, were correct on the treatment of two IRA rollovers done by Mr. Bobrow. Instead the Court ruled that only one of Mr. Bobrow’s rollovers was timely completed because - according to the Court - an individual can only do one IRA-to-IRA rollover per year. Period. End of story. No matter how many IRAs you may have, you can only do one rollover per year. The year is 365 days, not a calendar year and this reasoning would also apply to Roth-to-Roth rollovers as well.
This decision is the total opposite of the IRS interpretation of the tax code. In the proposed regulations, in IRS Publication 590, and in private letter rulings, IRS has said that you can do one rollover per year, per account. If you had two IRA accounts, you could do one rollover from each account in a 365 day period (provided you didn’t roll the money distributed from the first IRA into the second IRA). Now the Court says that this is not allowed. IRA account owners would be well advised to do no more than one 60-day rollover per year for the time being.
Inherited IRAs in Bankruptcy
This issue has come up several times over the last couple of years. Bankruptcy and Appellate Courts are divided on the issue - with the majority of courts saying that an inherited IRA is an exempt asset under the federal bankruptcy rules. Now the issue is going to the U.S. Supreme Court. The case is Clark v. Rameker, Trustee. Arguments are scheduled to be heard on March 24th and the Court should hand down its decision in June.
The decision will impact bankruptcy cases only. Creditor protection for inherited IRAs in other matters, such as court awards or non-payment of debts, is determined at the state level. The level of protection can vary widely.
- By Beverly DeVeny and Jared Trexler
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