Safety Leads to Penalty

Safety Leads to Penalty This is a true story and the names have been changed to protect the parties involved. A man retires from his employer in the mid 90's and decides to 'roll' his 401(k) to a retirement plan with NFS, LLC (a company owned by Fidelity that we use as custodian for some of our accounts.) At the time the amount rolled out of the 401(k) and into the IRA it was worth $217,848. All is well with this transaction. Since this account was held in a securities environment and the account fluctuated - primarily down, the owner decides to take advantage of high fixed rates and guarantees that banks are offering (this obviously didn't transpire recently.) When he takes the money out of the NFS, LLC IRA he completes the necessary paperwork and writes 'withdrawal' on the document. So far so good, the account owner is thinking that he'll be rolling into another IRA within 60 days there is nothing to worry about as far as income taxes are concerned.

Now off to the bank with his check for $200,689 to lock in those attractive guaranteed interest rates. Note the loss in account value - rolled $217,848 in and took $200,689 out - a loss of just over $17,000 - the reason for the move to protect the money. Once the bank representative notes that the amount is over $100,000 a suggestion is made to open two accounts, so each one will have FDIC insurance - one for him and one for his wife. Not a bad idea in theory as long as both accounts are opened as IRA's in the original IRA account owners name, not anyone else (spouse, dog, mistress, child, alter ego, etc. don't count.)

Believing everything is well and his IRA has been rolled over - to a safe environment - he goes about his business. He receives the 1099 from NFS, LLC the following February. The 1099 indicated a withdrawal of $205,298 from the IRA, taxable income of $5,298 and taxable income as $200,000. Tax on that amount, only $63,949. Ouch. (Everything would have been fine if the money had indeed gone into IRA's in the owner's name, but the money went into non-IRA accounts. Subsequently, in tax court, the IRA owner argues he asked to and thought he did set up IRA accounts. The IRS didn't 'buy' it and he paid dearly - $63,949). Bottom line is when it comes to finances be sure you're dealing with professionals who know what their doing. In the financial industry, many providers of 'advice' and product have no education or specialized training - a travesty. This is a very simple process that happens everyday and can lead to tragedy should the details be overlooked. This was not a process that leads to better, measurable outcomes - one certainly not worth following.