Resigning As the IRA
Custodian - A Be Careful
If the IRA Funds Are Not Being Transferred To Another IRA Custodian
There will be times when an IRA custodian
wishes to resign as the IRA custodian.
The traditional IRA plan agreement should
set forth the procedures to be used to resign.
As a general administrative rule, the IRA custodian wants to close the person's IRA by transferring the IRA funds to a successor IRA custodian rather than distributing the funds to the IRA owner.
A financial institution might wish to
resign due to its business decision to no
longer provide certain services with
respect to hard to value investments. For
example, the IRA custodian would mail a
letter to the IRA owner stating, "We have
made the business decision to no longer
service traditional IRAs which hold certain
hard to value investments. Your traditional
IRA holds such investments. You
may instruct us to liquidate these investments
and reinvest the proceeds. However,
if you wish to retain these types of
investments, you will need to establish an
IRA with an IRA custodian willing to service
IRAs with such investments. We hereby
inform you we are resigning as the IRA
custodian. Our resignation is effective as
of _________. We are providing you 45 days rather than the 30 days set forth in paragraph 2.7 of Article VIII. We wil assist in transferring your traditional IRA funds to your new IRA custodian. It is best if you transfer your IRA funds because there could be times when you intend to rollover such distribution, but you then determine that you are ineligible to make a rollover contribution. You may wish to discuss your situation with your tax advisor."
Again, as a general rule, an IRA custodian never wants to make a distribution to an IRA owner unless the IRA owner has requested the distribution. Why?
There is a good chance of litigation if an IRA custodian distributes IRA funds to a person who has not requested the distribution and person is ineligible to rollover such distribution. Why? The individual has an income liability he or she did not expect to have. In 2014 the IRA rollover rules were changed to restrict a person's right to rollover only one distribution in a 12 consecutive month period. For example, if Jane Doe withdrew $48,000 6 months ago and made a rollover contribution of the $48,000 within the 60 day time period into another IRA, then the individual is not required to include the $48,000 in her taxable income. However, if the IRA custodian makes a second IRA distribution of $48,000 to Jane Doe within the 12 month period, this second IRA distribution cannot be rolled over. Is she was in the 25% tax bracket, her tax liability is $12,000. This would be the result if the financial institution serving as the IRA custodian resigned and then made a distribution to Jane Doe 45 days later because Jane Doe had not responded to the financial institution's resignation letter.
If a financial institution wishes to resign as the IRA custodian, it is best that the IRA custodian has a plan of action to have each of the affected IRA owners find a new IRA custodian and then transfer such IRA funds.
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