Financial Institution- Correcting IRA Error?
What types of corrections can a financial institution make to correct a non-clerical error in opening an IRA account?
Without going into all the gory details, financial advisor gave incorrect advice to trustee and beneficiaries of late mother’s living trust and inherited IRA accounts were opened in 2012 based on this advice, even though they will be disallowed by the IRS. Financial institution has agreed to correct the error, but are now dragging their feet.
Is there any way for a financial institution to retroactively correct this type of error? I was initially told that it might involve having to unwind all transactions and the cancellation of advisory fees charged to the account. Now almost three months later, I am having difficulty getting any kind of information out of the financial institution. I am alarmed that they sent me a transfer form to complete, which would make it appear as if I was initiating the movement from a retirement account to a non-retirement account instead of them correcting an error.
I’d be grateful to hear from anyone who knows different ways in which any financial institutions may have corrected their errors which were not of a clerical nature.
Permalink Submitted by Audrey Mushinsky on Tue, 2014-03-25 14:12
I was informed yesterday that the following will take place:
Sounds like a lot of work to me, but it does show that a financial institution can go back in time and correct an IRA error. Wonder what the ramifications are for them with the IRS? Any fines or costs associated with something like this?
Permalink Submitted by Jose Morales on Tue, 2014-03-25 18:37
Why were 1099-Rs issued in 2012 and 2013? This part doesn’t make sense to me. Did the mother have an IRA account or not? If not, there would be no 1099-R in 2012 to correct when her non-IRA account was closed. As IRA Custodians we are required to provide accurate reporting to the IRS. If funds were put into an IRA account from an account that was not an IRA account, the amounts up to the individuals yearly contribution limit would have been considered a contribution. Any amount above the contribution limit would have been considered an excess contribution. The IRS has methods of correcting these errors appropriately, which would involve removing the excess (deemed or true) by the tax filing due date plus extensions in order to avoid a 6% tax penalty. If that excess was not removed by the deadline to avoid the penalty, and the excess were solely due to the FI’s error, the individual could ask for the penalty to be waived on Form 5329. The mechanics of simply submitting corrected tax forms to “take back” the error as if it never actually happened might be easy, but when you submit a correction by paper to the IRS the individual submitting the correction is doing so while also attesting to the following, “Under penalty of perjury, I declare that I have examined this return and accompanying documents, and to the best of my knowledge and belief, they are true, correct, and complete.” If they are submitting to the IRS that funds were never in an IRA (correctly or incorrectly) and funds were never removed from an IRA (correctly or incorrectly) and that is not in fact true, they are putting themselves at some risk.
Permalink Submitted by Audrey Mushinsky on Thu, 2014-03-27 17:08
1099-Rs were issued in 2012 and 2013 for RMDs taken on the inherited IRA account opened in 2012 (mother died in 2011)Mother did have three separate IRA accounts funded by annuity contracts. Big problem was that a trust was named as beneficiary and issuers of the annuity contracts would only allow lump sum distributions to a trust, thereby eliminating possibility of inherited IRAs for beneficiaries of a see-through trust. Financial advisor overlooked this problem and continued to advise trustee and trust beneficiaries that option of electing inherited IRAs was available.The custodians for the inherited IRA accounts allowed these accounts to be opened without a properly completed transfer form detailing the trustee to trustee transfer form to be completed. IMO, if this form had been required, the error would have become apparent at that time or fraud would have been committed in completing that form. In hindsight, the new custodians were very much remiss in not requiring this information.I agree with your overview of excess contributions and the associated penalities. In this case, too much time had elapsed to avoid IRS penalties and thus a retroactive correction was corrected. The mess created by this presents significant dealings with the IRS over a number of years.Does this make the situation clearer for you? I’m happy to answer any questions so that others may benefit. I cannot find much on the subject of financial institutions correcting non-clerical errors.
Permalink Submitted by Jose Morales on Fri, 2014-03-28 15:47
The proper way to correct this would have been with an excess contribution correction.
Permalink Submitted by Audrey Mushinsky on Thu, 2014-03-27 17:46
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Permalink Submitted by JEFFREY SANDLER on Sun, 2014-10-05 17:08
I’m 50 years old and the beneficiary of an Inherited IRA owned by father and my mother was the original IRA depositor. I’m being told that I am required to withdraw all funds from this IRA in the next 5 years vs. over my expected life using the single life table. While this advice is true what I discovered was that my when mother passed away in 2012 my father was the benificiary of her IRA. At that time, my dad submitted paperwork to open a new IRA in his name and have my mother’s IRA assets transferred into his IRA. Unfortunately, the financial instituion mistakenly opened an Inherited IRA for my dad. Earlier this year my dad passed away.While the financial instituion admits to transferring my mother’s IRA into the wrong type of IRA for my dad, they are unwilling to correct this mistake with the IRS since my father is no longer alive. They have told me they will send me a letter explaining the issue. They told me that I can direct them to give me RMDs over my life using the single life table vs. over 5 years. They have also told me that their letter will service as “evidence” or backup if the IRS ever raises questions about the timing of these distributons. I would like the custodian to take responsiblity for this mistake and correct this directly with the IRS or at a mnimum let me transfer the assets from the Inherited IRA with my mother as original depositor into an Inherited IRA with my father as original depositer so I can use the single life table. What should my financial instituion or I be doing to corret this error?
Permalink Submitted by Alan - IRA critic on Sun, 2014-10-05 19:07
Duplicate post – see other thread.