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IRA Crisis

By Tim Berry, JD - Email Editor

June

Dear Valued Reader,

Back in 2009, I wrote an article I called, "The Dummy Contract."

The gist of the article was that every day we are being presented contracts to sign and 90% of the time we sign them without being the slightest bit aware of the legal consequences of what we sign. One of the examples I gave in that article was IRA agreements.

Typically when we open up a brokerage account for our IRA, the brokerage firm requires us to sign a "dummy contract" where we agree to either indemnify the firm for any losses or pledge any personal accounts we have with that firm as collateral in case the IRA goes upside down. It's amazing they even ask for indemnification or a lien on your other assets because after all, how can an IRA invested in the stock market, mutual funds, or bonds go upside down?

Here's the big challenge, even though we were assured:

- that the firm or its representatives had our best interests at heart
- the firm or its representatives were IRA experts
- the firm or its representatives were there to make us successful

the firm or its representatives in reality caused us to lose our IRA

Sure we've all been brainwashed to think we have an IRA. Yep, we get incorrect account statements saying we have IRAs as well, but we don't.

What backup do I have for my assertion? Bear with me as I explain. A few years back I was giving a presentation to the local estate planning council and a broker who worked at one of the big wirehouses came up to me and said they would like to work with me on some projects. Being the gracious person I am, I said I would love to but just wanted to review their IRA docs to make sure they were fully compliant.

As I read the IRA docs it became painfully obvious that anyone who signed these documents would cause their IRA to be distributed. I told that to the broker who just chuckled and said they were pretty sure their attorneys were aware of the issue. After looking at a bunch of other brokerage house docs I found out they all pretty much had the same boilerplate language, language that caused a distribution of someone's IRA.

Doing my best to imitate Chicken Little I would point this out at presentations and with various legal staffs, with the same result. My claims were ignored. Heck I even had a onetime president of one of the larger investment advisor trade groups call me and ask why I would even share this information with anyone as it could do nothing other than cause people harm.

So much for being proactive about a problem and fixing it.

Finally in 08 I asked the Department of Labor (little known fact, DOL is in charge of interpreting certain rules for IRAs, the IRS is merely the enforcers) for an Opinion as to whether my opinion that the account applications were causing distributions was correct or not. In 09, the DOL issued Advisory Opinion 2009-03A saying that if an individual personally guarantees their IRA, that would be considered an extension of credit between the individual and their IRA, which creates something called a prohibited transaction.

Under the tax code, if an IRA engages in a prohibited transaction, that means it is considered completely and fully distributed. By the way, this isn't rocket science. Anyone who professes to have some expert knowledge in the area of IRAs should be on top of the various DOL Opinions and thus should be aware of this issue. Having said that, when was the last time your IRA guru shared this info with you?

Take a second or even an hour to review the account application and brokerage agreement that you signed when you opened your IRA. Do you see the words indemnify, pledge, or security anywhere? If you do there is a very high likelihood you no longer have an IRA.

Oh, by the way, if you don't have an IRA anymore do you think it is exempt from the claims of your creditors?

(This is Part one of a two part series. Next week we will go over how to correct this travesty) Stay Tuned.

Call 888.916.7070 or email info@trustmakers.com

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