Tuesday, May 20, 2014

More Musings on the New Rollover Limitation

One of the truisms of our industry, as it is a truism of life, is that “nothing is as constant as change.”  That certainly applies to the IRA rollover limitation issue, which reared its head in the Bobrow v. Commissioner U.S. Tax Court case, and completely upended thirty-plus years of IRS interpretation on IRA rollovers.   As most will remember, the Court disallowed a taxpayer’s IRA rollover on the grounds that he was limited to one rollover distribution per taxpayer per 12-month period, not one rollover per IRA per 12-month period.  Proposed regulations dating back to 1981, and IRS publications, had formerly granted the more liberal option.
That’s water under the bridge, because the IRS has fallen into marching step with the new drummer – the U.S. Tax Court.  The IRS revealed in Announcement 2014-15 that, going forward, the rule will be one IRA distribution per taxpayer, not per IRA, that will be eligible for an indirect 60-day rollover in any 12 month period.   Released in March, Ann. 2014-15 stated that the IRS would not enforce this new interpretation before January 1, 2015.  Ascensus has since learned from a reliable IRS contact that the “no sooner than” timing for enforcement of this new interpretation will, in fact, be January 1, 2015.  The IRS representative stated that the nine month enforcement reprieve – from March to next January – was granted in response to industry requests for a grace period to allow IRA custodians, trustees and issuers to adjust their procedures.

Some over-eager service providers did not wait until the IRS released Ann. 2014-15, but responded to the January Tax Court decision and immediately informed clients and prospects that they should amend their IRA documents, advising that they do this at the first opportunity.  They also indicated that the new interpretation had to be followed and adhered to immediately.  This was suggested not only before the IRS responded to the Tax Court ruling by issuing Ann. 2014-15, but before it was even known whether the Bobrow case would be appealed, and whether its ruling might be upheld, or reversed. 
The point here is that it is usually best in such situations to let the dust settle, to not over-react, or – as some might do – take an opportunistic tack and recommend actions prematurely.  Yes, IRA documents will certainly have to be revised for new accounts, and it is advisable that existing IRAs be updated to align with the new interpretation that will govern future rollovers.  But, as revealed in Ann. 2014-15, we are still nearly seven months away from the earliest enforcement date for the new rule, and no date has been even hinted at for updating existing IRAs.  For the remainder of 2014, the enforcement of the rule will remain as it has been, one rollover per IRA. 

A little reflection on the new rollover interpretation might also be in order here, given the level of uproar and resistance seen within the industry.  Many were predictably upset that the Tax Court ruled as it did, reversing a long-held tradition and contradicting an oft-stated and oft-published IRS position.   Perhaps more upsetting was the fact the IRS brought this case in the first place and didn't give credence to their own published guidance.  Regardless of this, the statutory reference to rollovers in the Internal Revenue Code has not changed since 1978, and a plain-language reading of it – while somewhat ambiguous – can in all honesty be read as the Tax Court did, limiting rollovers to one per-taxpayer per year.   
The Tax Court took the position that our lawmakers intended to make access to IRA funds possible, but not so easy as to encourage abuses.  “Leakage,” or frittering away retirement assets, has long been a concern of Congress.  Also, there are clear prohibited transaction rules that discourage an IRA owner from dealing “…with the income or assets of a plan in his own interest or for his own account.”  IRA assets are to be preserved for retirement as much as possible.  Some might say that the strategy – permissible under the existing rules – of setting up multiple IRAs and thereby receiving multiple rollable distributions within the same 12-month period, was tantamount to enabling the taking of multiple 60-day “loans” from one’s IRAs.  Put another way, that person could, in some peoples minds,  be accused of using IRA assets “in his own interest.” 

As much as we like flexibility and freedom when it comes to our own property, we can’t ignore the desirability of accumulating sufficient assets to experience a reasonably comfortable, independent retirement.  We also can’t ignore the fact that we typically receive a tax break as an encouragement for us to save.  Sometimes we rely on our own discipline to resist temptation and make the right choices, and sometimes the Tax Code does it on our behalf.  If it serves the ultimate end of helping us accumulate assets for a secure retirement, maybe the change in the rollover limitation won’t be such a bad thing after all.