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.
