Revocation of new IRA

Submitted by Linda Randazzo on Sat, 2010-07-17 14:02

According to Reg D when a time deposit (IRA or regular CD) is closed during the 1st 6 days of opening it 7 days of interest must be charged as penalty. I know IRAs have a revocation period of 7 days and i believe IRS rules would superseed reg D in regards to the full return of principle deposited. I don’t think we can go into principle or return any less than was deposited if the IRA participant revokes their IRA within the 7 days. Am i on the right track or not?

Thanks



Submitted by Anonymous (not verified) on Sat, 2010-07-17 19:26

If an IRA is revoked within 7 days (calendar), the custodian must refund the orginal contribution (without any gains or losses). This only applies to newly opened IRAs. Any contribution made to an existing plan does not allow for revocation.

The bank should have this provision outlined in their custodial account agreement and that is clearly stated in the IRA Regs and in Pub 590 (page 9-10). This will supercede the Reg D.

Note: The revocation [u]will[/u] be reported as a distribution.

pmk



Submitted by Linda Randazzo on Sat, 2010-07-17 20:14

Thanks



Submitted by Alan Spross on Sun, 2010-07-18 02:13

pmk,

You seem to have worked with revocations. The Regs indicate that the contribution must be returned without deduction of fees or market fluctuations. It does not seem logical that someone could roll over a large IRA and in the first couple days have their stocks tank 50%, then revoke the account and recover the full amount of the rollover contribution. But this is what the disclosure statements and the Regs seem to indicate.
If correct, this seems like something that could be abused by IRA owners. What am I missing?



Submitted by Anonymous (not verified) on Sun, 2010-07-18 23:35

alan:

I tend to agree with you that this is one of those rules that can be abused.
My experience is limited to the basics and the coding issues. I have really only dealt with revocations for clients that just started an IRA for the first time or made mistakes opening them electronically. The amounts were therefore limited to the maximum allowable contribution AND no actual stocks, but rather mutual funds.

I still think it would be rather risky to get this actually to work. Extreme value swings will only occur with highly volatile stocks (penny stocks, etc.). The rules state that a revocation must be done in writing so the person must really have all things in place to time this correctly. Overnight the letter?; bring it to the branch office? If existing stocks are asset transfered, the timing must be correct. There probably are less inkind rollovers of stocks (from employer plans or maybe with certificates?). Rolling or transferring cash and making the brokerage purchase immediately would throw you in the 3 day clearing period, which can be another stumbling block. Then the stocks would have to tank at the right day. What if they recovered dramatically somewhere during this time? All this time you are facing the 7 calendar day revocation deadline (a weekend could be involved). At the end, the amount is reported to the IRS as a large distribution that needs to be explained. I am not sure, with so many unkowns this is worth attempting. Just my initial take on all the variables…..

pmk



Submitted by Jose Morales on Mon, 2010-07-19 16:16

[quote=”[email protected]“]pmk,

You seem to have worked with revocations. The Regs indicate that the contribution must be returned without deduction of fees or market fluctuations. It does not seem logical that someone could roll over a large IRA and in the first couple days have their stocks tank 50%, then revoke the account and recover the full amount of the rollover contribution. But this is what the disclosure statements and the Regs seem to indicate.
If correct, this seems like something that could be abused by IRA owners. What am I missing?[/quote]

When I worked for a major mutual fund company we would only allow newly opened account via rollover to be invested in a money market account until the 7 day period had passed. This allowed for the account to be protected from losing value and running into the above situation. After the 7 day revocation period had passed the clients were allowed to direct their investments as they wished.



Submitted by Jose Morales on Mon, 2010-07-19 16:17

[quote=”[email protected]“]pmk,

You seem to have worked with revocations. The Regs indicate that the contribution must be returned without deduction of fees or market fluctuations. It does not seem logical that someone could roll over a large IRA and in the first couple days have their stocks tank 50%, then revoke the account and recover the full amount of the rollover contribution. But this is what the disclosure statements and the Regs seem to indicate.
If correct, this seems like something that could be abused by IRA owners. What am I missing?[/quote]

One other detail to note is that the 7 day period begins when the IRA plan documents are received, not when the funds arrive. If you hand a potential client the plan documents and they return with a check a week later the 7 day period would have already passed.



Submitted by Anonymous (not verified) on Mon, 2010-07-19 16:53

Ignoring the revocation issue, how can a large outfit restrict your money from moving for 7 days? I would be interested in how that is disclosed in their IRA information? Do you have that verbiage to post?

Thanks.

pmk



Submitted by Alan Spross on Mon, 2010-07-19 23:38

I had considered the hold on investments when trying to reconcile how this measure could not be abused, and that did seem the obvious solution, especially with rollover IRAs of unlimited value, where even a 10% market decline would produce losses that would tempt the owner to consider revocation.

Probably the vast majority of investors are unaware of this provision despite it’s prominent position in the IRA disclosure section, and that would eliminate most market driven requests for revocation.



Submitted by Jose Morales on Mon, 2010-07-19 23:40

[quote=”[email protected]“]Ignoring the revocation issue, how can a large outfit restrict your money from moving for 7 days? I would be interested in how that is disclosed in their IRA information? Do you have that verbiage to post?

Thanks.

pmk[/quote]

This was over 12 years ago, I don’t have access to any of their forms now.



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