IRS may allow rollovers of IRA distributions received from RTC even if previously rolled over within the past year.

The IRS has unofficially indicated that individuals may be able to roll over individual retirement account (IRA) distributions received from the Resolution Trust Corporation (RTC) that were previously rolled over within the past year without violating Sec. 408(d)(3)(B). In a letter to the Federal Deposit Insurance Corporation (FDIC), the Service stated that individuals receiving involuntary IRA distributions made by the RTC as a result of the insolvency of a financial institution would not be prevented from rolling over the distributions to a new IRA, if all other applicable requirements - such the 60-day limit - were met.

The situation in question occurs when an individual receives a distribution from an IRA and rolls over the distribution into an IRA at a financial institution that is subsequently taken over by the RTC. If the RTC in its capacity as receiver for the institution is unable to find a purchaser for the IRA, it distributes the IRA assets. If this distribution takes place within one year of the individual's IRA rollover to the failed financial institution, the individual would not, absent an exception to Sec. 408(d)(3)(B), be able to roll over those assets into another IRA. However, the IRS's position seems to be that if the IRA distribution is from the RTC, the individuals receiving the distribution can roll over the assets without violating Sec. 408(d)(3)(B).

Example 1: Individual Z receives a distribution of $2,000 from IRA # 1 on Jan. 1, 1992. Z then rolls over the assets into IRA #2 at a local bank on Feb. 1, 1992. The bank is taken over by the RTC on Mar. 1, 1992. The RTC is unable to find a purchaser for Z's IRA; thus, it distributes all the assets in IRA #2 to Z before the end of 1992. If Z rolls over the assets received from IRA #2 within 60 days, he will technically violate Sec. 408(d)(3)(B) because the rollover will occur within the one-year period following the IRA #1 rollover (Feb. 1, 1992). However, the unofficial FDIC letter would allow Z to roll over the assets even though the one-year waiting period had not elapsed.

Taxation of

IRA distributions

Sec. 408(d) provides that the value of assets distributed from an IRA is included in the payee's gross income in the year received. An exception to this general rule allows a payee to defer including in gross income the value of distributed IRA assets by rolling over the assets into an IRA (Sec. 408(d)(3)(A)). To take advantage of this exception, generally two requirements must be satisfied: (1) The amount received must be paid into an IRA within 60 days after actual receipt of the distribution and (2) a rollover contribution of the IRA must not have been made at any time within the past year.

One-year limitation

on IRA rollover

contributions

See 408(d)(3)(B) provides that the rollover contribution exception can be used only once in a one-year period. IRS Letter Ruling 8731041 provided some guidance with respect to how this rule was to be interpreted.

The . . . rule applies to each separate individual retirement account, individual retirement annuity, or retirement bond maintained by an individual.

On its face, this language could mean that the one-year prohibition on rollovers from an IRA applies only to each IRA from which the assets are received. However, the authors believe the IRS applies a more restrictive interpretation. It appears that the Service interprets Sec. 408(d)(3)(B) to prohibit rollovers within one year from any IRA involved in a particular rollover contribution transaction. In a typical IRA rollover contribution transaction, assets from one IRA are distributed to the owner of the account, and within 60 days of receipt the owner rolls over the assets to a different IRA. Thus, the assets of the two IRAs involved in the rollover contribution

transaction - the IRA receiving the rollover contribution and the IRA that distributed the assets - cannot be distributed and rolled over into yet another IRA within the next year without violating Sec. 408(d)(3)(B).

Individuals maintaining IRAs that were not part of a rollover contribution transaction within the past year may distribute and roll over assets from these IRAs without violating the one-year restriction. Although Letter Ruling 8731041 does not directly provide the authors' suggested interpretation, it does illustrate it in the following example.

Example 2: Individual D maintains two IRAs, IRA #1 and IRA #2, and rolls over IRA #1 into IRA #3. D is not precluded by Sec. 408(d)(3) from making a tax-free rollover from IRA #2 to IRA #3 or to any other IRA within the one-year period after the rollover from IRA #1 to IRA #3.

Rollovers from IRA #3 would likely be prohibited for one year, although this was not discussed directly in the ruling.

Trustee-to-trustee IRA transfer 

As an alternative to a rollover contribution, individuals may elect a trustee-to-trustee transfer of their IRA assets. In a trustee-to-trustee transfer, no distribution of assets is made to the IRA's owner; instead, the current trustee directly transfers the assets to the new trustee. Thus, the IRA assets are never in the IRA owner's possession. In Rev. Rul. 78-406, the Service held that a direct transfer of IRA assets between IRA trustees will not be considered a rollover contribution described in Sec. 408(d)(3)(A) because no payment or distribution of the funds had occurred. Thus, a trustee-to-trustee transfer of IRA assets would not prohibit an individual from rolling over the assets of an IRA distribution at any time.