Are IRA transfer fees credited by 3rd party contributions?
We have a client that transferred Roth IRA’s from JP Morgan Chase over to TD Ameritrade. In the process Chase slapped the clients with a $75 transfer fee to each of their Roth IRA’s. Since the clients were new TD offered to credit the transfer fees that Chase assessed. Based on how they code the transaction, TD said the crediting/fee reversal won’t show up on a 5498. In addition, IRS Pub 590 lists that there is no contribution limit for trustees fees.
While this practice appears to be quite common, I was looking for a more definitive answer regarding the transaction and whether it is actually Kosher as a non-contribution or if it in fact should be considered a contribution and the clients need to account for it in their 2011 contribution totals?
If you have an answer could you point me to a PLR, Reg, or Code, so I could get a more definitive answer?
Thanks, Richard
Permalink Submitted by Jose Morales on Thu, 2011-11-17 16:22
If an individual were to replace the funds taken from an IRA account for fees themselves it would have to be coded as a contribution, so I don’t see how it could be any different if the IRA Custodian does it. However, as with many things in the IRA world, many Custodians/Trustees may have taken the mind set that there is a low risk of getting caught by the IRS so they will do it anyway. I’m guessing they will hide this deposit as earnings in some form or another. If caught the party damaged the most will be the IRA owner, especially if the deposit would result in an excess contribution in the event they have already made their maximum allowable contribution.
Permalink Submitted by Alan Spross on Thu, 2011-11-17 18:36
This practice is so widespread and advertised, it is probably authorized under a “PTCE” (prohibited transaction class exemption). One of the earlier PTCEs was 93-1, commonly referred to as the “free toaster” exemption. I believe that there was a $20 limit initially, but perhaps this has been expanded or superceded by another PTCE. There are a raft of these for both ERISA plans and IRAs, with the IRS issuing most of the IRA exemptions.
Of course, some institutions may be exceeding the current limits, or may not be aware of whatever limit exists.
Permalink Submitted by Peter Lingane on Mon, 2011-11-21 16:14
The $20 93-1 toaster exception applies “to the payment … to an individual for whose benefit the IRA or Keogh plan is established.” (For the text of granted class exemptions, see http://www.dol.gov/ebsa/Regs/ClassExemptions/main.html.)
I came across an unnamed blogger who distinguished between payments to the IRA owner and payments to the IRA and suggested that a payment to the IRA should be construed as earnings and therefore not a prohibited transaction. Thoughts?
Permalink Submitted by Alan Spross on Mon, 2011-11-21 17:16
The answer may date back to IRS Announcement 90-1, which states that the IRS has adopted a “non enforcement” policy with respect to the “toaster exemption” stated in PTCE 93-1. That would explain how the original $10/$20 limits to the exemption have been allowed to expand to present levels, which appear to be a high as $150 with some custodians.
The net affect of these reimbursements would be taxable income when distributed because the IRA balance will be higher than it otherwise would be, but if exit fees are the basis for the payments, the IRA balance would just offset the reduction caused by the exit fees.
Permalink Submitted by Jose Morales on Mon, 2011-11-21 23:31
The toasters weren’t being given to the IRA account in the ruling the IRS gave out, these reimbursements are being given to the IRA account not directly to the individual. I’m pretty sure that this type of thing would be more trouble to control than it’s worth for the IRS due to the level of this kind of reimbursement being made by so many Custodians.
The suggestion that the payment to the IRA be identified as interest is exactly how this type of reimbursement is hidden.
Permalink Submitted by Alan Spross on Tue, 2011-11-22 00:42
To date, the bulk of the credited fees are apparently limited to fee reimbursements, as you outlined. As such they represent the replacement of IRA administrative fees, leaving the IRA owner in the same position as they would have been at the original custodian. If things expand too much beyond that, the IRS would eventually step in to establish limits to this activity.
It is fairly obvious that presently the IRS is not overly concerned with the practice, unless rulings have been made that we are not aware of. But if this is abused or significantly expanded, the IRS would likely step in like they did with the wash sale Notice, and it would be easier to manage because the IRS could do it at the custodian level rather than having to determine the activities of millions of participants.