Non-Deductible IRA Contributions and Bad Financial Advice Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

Horror stories are tough to hear. Below we share a story from someone given poor advice by his financial advisor. We also answer two other questions in this week’s installment of The Slott Report Mailbag. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

I have a 24,566 shares of a company in my (traditional — NOT Roth) IRA.

The company has been subject to a takeover offer of $1.50/share cash for each share.

I am one of a group of shareholders (together we hold about 7% of the shares of the company) who feel the $1.50/share cash offer is woefully low and unfair. The company is a Canadian company. Under Canadian law, those shareholders who believe that the takeover offer is unfair may “Dissent” and ask a court in Canada to decide upon a Fair Value for the shares, which the company making the takeover would then have to pay. A dissenting shareholder is guaranteed to receive the $1.50/share that the majority (93%) of the shareholders already have received, but a dissenting shareholder may receive more than $1.50/share.

I wish to dissent. In order to dissent, I must write two letters to the company (no problem there) and transmit my share certificate to the company. My questions involve the transmitting or delivering of my share certificate to the company.

My questions are these:

May the firm (TD Ameritrade Holding) that acts as custodian for my shares deliver the share certificate to the company so that I may dissent?

If so, would the delivery constitute a distribution from my IRA?

Could the transfer of shares to the company be considered a simple sale of the shares for future consideration? (I will be paid at least $1.50/share eventually — but it might be many months or even one or two years until the payment is made.)

Any help you can give me on this matter would be appreciated.

Thank you!

Answer:
This is a very interesting dilemma. If the shares go out of your IRA account at TD Ameritrade without an offsetting entry it will be considered a taxable distribution. In addition if you are under age 59 1/2 you could incur an early distribution penalty of 10%. I would suggest you communicate with TD Ameritrade and the company about your dilemma and see if either could come up with a suitable solution.

2.

Two long-practicing CPAs in my city of Memphis have told me that the non-deductible IRA is still subject to the IRA income limit for a deductible IRA – if you are in a qualified plan (and/or make too much). They say this is ERISA law – Code sections 219 and 408, pages 4351, 4352, and 4353 in the RIA reference book.

Can you please let me know about this please? In the past I thought that you could fund a non-deductible IRA regardless of your income or your retirement plan.

Thank you,

Vera Feldman

Answer:
A non-deductible IRA contribution is not subject to any income limits. The confusion here is perhaps that Sec. 219 of the IRS tax code sets out the deduction amount and Sec.408 states that the contribution can not exceed the amount in affect, (i.e. amount allowed as a contribution), in Sec.219. Sec. 408 is not the amount of the deduction allowed but merely stating that it can not exceed the amount that can be contributed.

The IRS Publication 590 addresses non-deductible contributions on page 19. Also see the instructions for Form 8606 page 5 for additional information on the subject.

3.

Dear Mr. Slott and Company,

During some of the financial crisis I met with my financial adviser and I told him I wanted to get out of some of the mutual funds I was in because they were too volatile. He went through the list of accounts with my wife and I and told me to sell certain investments and he would let me know what new mutual funds I should buy. I went home that night and got online with Firstrade and sold the investments he told me to as well as calling Dodge & Cox to sell another account he told me to sell. This was my wife’s Beneficiary IRA she had inherited upon her Dad’s death. Dodge & Cox asked me if I wanted to put it into their money market fund and I said no the financial adviser told me to sell/redeem it. They sent me a check to my checking account. I waited for the financial adviser to get back to me with the new mutual funds to invest in. When he did I tried to set up a new Beneficiary IRA with Firstrade. They said OK and I would have to send them a statement from the bank notarized and the last Dodge & Cox statement to set up the Beneficiary IRA. A week later they called me and said they were sorry but I couldn’t set up the Beneficiary IRA with them. I called Dodge & Cox back and they said I could return the money to them and reestablish the account. A day later they called and said they couldn’t do that either.

My problem is this: I received bad advice from my financial adviser, a mutual fund company, and a brokerage house regarding this Beneficiary IRA. Had I been told by any of them to transfer it instead of selling it I wouldn’t have the tax problem I now have. Now I have to report it as income and pay taxes on the $28K instead of receiving yearly disbursements. It has also pushed me into a higher income bracket so the total hit for the Beneficiary IRA is an extra $7500 in taxes.

My question is this: How is a layman supposed to know what to do with a Beneficiary IRA when a financial adviser, a mutual fund company and a brokerage house all gave me bad advice.

I have been told by 2 different IRA agents to send for a letter ruling and I would like to know what is your advice.

Thanks,

Gary A. Moore

Answer:
Unfortunately it appears that the advice you received from the custodians is correct. You can not re-establish a beneficiary IRA. In this case, IRS will not be able to grant relief because a non-spouse beneficiary can not do a 60 day rollover so a request for a Private Letter Ruling request would not help. The only possible recourse you might have is with your advisor. IRS Publication 590 discusses what a non-spouse beneficiary can and can not do regarding an inherited IRA.