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IRA Crisis - Part 2

By Tim Berry, JD - Email Editor

June

Dear Valued Reader,

A brief recap from last week's article, due to the language most brokerage firms have in their IRA applications, there is a good chance your IRA has blown its IRA status.

Have you ever thought about all the various ways that our IRAs permeate our financial lives? Yeah, I never did either until I started looking into the reality that most people's IRAs have been disqualified.

So for example, if you retire from IBM and have built up a 500K nest egg, if you move that nest egg into an account that is not an IRA the entire 500K is subject to taxes, immediately. How many of you have filed tax returns telling the IRS you blew your IRA status 10 or 15 years ago? Not only that, but if the account grew by $75K a year, if you thought the account was a valid IRA, you thought you didn't have to pay taxes on the growth. Can you see a big tax bill building up and compounding here?

Ok, let's say a couple years later you realize your mistake and transfer your faux IRA of 500K (yeah the numbers don't work out, but I'm trying to keep things simple) to a new custodian that doesn't have the bad language in their agreement. Ooops, tax code says once the account is distributed, it is distributed, thus you just moved 500K of non IRA money into an IRA account. To put that into accountant speak, you just made an excess contribution to an IRA, the penalty for doing that is an excise tax of 6% a year, or 30K a year.

By the way, those of you converting your IRAs to a Roth IRA this year should really take note. You have to have an IRA to convert to a Roth IRA. If your IRA was blown by some stupid account agreement, you don't have a traditional IRA to convert and now you are liable for the excess contribution penalties.

What typically pops into a lot of people's minds right now is S.O.L. No, no, I'm not talking about some profane phrase, rather I'm talking about the Statute Of Limitations. Bad news here, I went through about a 6 month debate about this very subject with the IRS, they were trying to say I was being a tax shelter promoter by even talking about the subject. I don't think you'll be surprised to know that they feel the SOL does not apply in this case and thus the taxes and penalties aren't going to just disappear.

That's the tax world.

Let's talk about asset protection

Typically an IRA is an exempt asset that is not subject to the claims of creditors. But what happens if the account you thought was an IRA is no longer an IRA? Is it exempt? Nope, it would just be a plain old personal brokerage account, an account that is probably fully subject to the claims of creditors. Don't think bankruptcy trustees aren't aware of this. They are paid commission on what assets they collect so this is a nice profit center for them.

A case just came across my desk where a bankruptcy trustee is analyzing a situation where a doctor left one employer, rolled his pension into an IRA, and then rolled the IRA into the pension of a new employer. Subsequently the doctor filed bankruptcy and the trustee is now thinking about going after the pension on the theory the doctor blew up his account when the doctor transferred it into the IRA, and thus wasn't able to "roll" it into the new pension. Lots of money at stake.

How about student aid and Medicare formulas? Do they have different results depending upon if the account you have is a qualified IRA account or just a personal brokerage account? You bet they do, the differences could amount to tens of thousands of dollars.

The moral of the story here is you can't just stick your head in the sand. Sure the brokerage firms have caused a financial disaster, but it is up to you to fix the disaster. How do you fix the disaster? Easy, tell the IRS about your problem. The IRS has a formal program where if you knock on the IRS's door before they knock on yours, they can pretty much grant you clemency for engaging in the prohibited transaction with your IRA. The program doesn't work for everyone but will work for about 90% of the cases out there. That means that you get your IRA back along with all its tax deferral and asset protection, its treated as if there was never a distribution.

As you would expect we are helping people through their IRA issues. If you have an interest in fixing yours, feel free to call (888.916.7070) or email info@trustmakers.com

By Tim Berry

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