Had the opportunity to listen to a presentation from Mr. Timothy Berry, an attorney specializing in IRA law, regarding what he characterized as a fundamental flaw in the IRA account applications used by many of the major IRA custodians.
More specifically, this flaw was explained as a provision in the account applications whereby the account owner agreed to grant the custodian the right to place a lien on the IRA account in order to satisfy debt obligations that might arise from any other activity the account holder might enter into with the custodian. The specific wording of an example application reads as follow:
[b]Section 7: Granting a Lien on Your accounts.[/b]
[i]As security for the repayment of all present or future indebtedness owed to us by each Account Holder, each Account Holder Grants to us a first, perfected and prior lien, a continuing security interest, and right of set-off with respect to, all property that is, now or in the future, held, carried or maintained for any purpose, in or through XXXXX firm, and, to the extent of such Account Holder’s interest in or through, any present or future account with us or our affiliates in which the account Holder has an interest.[/i]
The speaker displayed a copy of an advisory opinion issued by the United States Department of Labor which stated the following, to wit:
[i]It is the opinion of the Department that the grant by an IRA owner to the Broker of a security interest in his non-IRA accounts in order to cover indebtedness of, or arising from, his IRA, as you describe, would be a prohibited transaction under code section 4975(c)(1)(B)[/i]
The advisory opinion was dated October 27,2009 and had the reference number of 2009-03A.
Mr. Berry’s position is that any account established with this wording included in the application, does not qualify as an IRA account because it fails to comply with the code. Therefore, anyone who has rolled over a 401-K into an IRA with a custodian using such verbage really does not have an IRA but rather has taken a premature distribution. They are subject to the penalties, taxes and interest for a premature disturbution based on the value of the account at the time of the rollover, which could amount to as much as 60% of the original account value, regardless if the account value has fallen because of conditions in the market.
Mr. Berry went on to state that the IRS does not want all of the adverse publicity that would come from imposing all of these penalties and fees on retirees when the issue did not result from an action on their part but from the custodians. It was Mr. Berry’s contention that the IRS wanted to work with people who were in this position if they would apply for clemency and agree to pay the IRS a small fine ranging from $500 to a few thousand, depending on the value of the account. Should you want to contact Mr. Berry to discuss these issues, he resides in Gilbert, Arizona and his firm’s web address is http://www.IRAResolution.com.
As a means of reaching a resolution to this issue for anyone who would be affected, Mr. Berry offered to negotiate on their behalf with the IRS. The Legal Service Fee was $1995, which when added to the IRS penalty would come to a total of at least $2500. However, it was also suggested that action could be taken against the offending IRA custodians to recover these costs.
What familiarity do you have with this issue? Any thoughts regarding the cost of representation. I would appreciate you input on this matter, especially as it has the potential to affect millions of Americans if Mr. Berry is correct in his assessment.
Thanks,
Dan Cary Sr.