Has my Financial Planner screwed me? I exceeded the AGI!

[Guest tpainton]

IN april of 2002 a financial planner set me up with a ROTH IRA. Basically he told me it was the right thing to do.

Silly me, I actually trusted this guy from a very reputable brokerage firm known nationwide and consistantly ranked in the top five.

I get a call from a new guy who said he had taken over my account (I assume the old guy was fired) and that I exceed the AGI allowed for a roth (married, 167,000K) OOPPS sorry about that!

I am supposed to call him on Monday.. Now I am stressing all weekend about this. I have about 10K in the account. If I recharacterize it to a traditional ROTH, what penality do I pay? Do I need to pay any tax on this?

I would like to get out of this as pain free as possible. I do not qualify for any of the reasons allowing early withdrawl as well.

Thanks, would love an answer before monday.. I am stressed out!

[GBurns]

There is nothing to be stressed out about as yet. Has he told you what the significance is and what the consequences are? Has he outlined your alternatives?

Until all of these are known, there really is nothing to even think about.

If he has not done these as yet I would consider changinf advisors. After all why call just to give bad news give and no solution or advice?

[JAMES PATRICK]

I probably don't understand a few things in your post.

When did you make the contribution to the Roth 2002 or 2003 or both? How much?

Who did your taxes for 2002 and did you tell them you opened a Roth?

The worst case scenario that I see at this point is that you pay a 6% penalty on 2002 contributions and if you had earnings will have to pay taxes and 10% penalty on them. Any 2003 contributions can be withdrawn without penalty by 4/15/04 but should be pulled out ASAP.

If he left that message on your machine I would really question his judgement. There was NO emergency for you to do something THAT moment and he could have just said he would like to discuss certain aspects of your account as the account rep. If he actually spoke to you and didn't tell you what was necessary to correct the situation, then not only is his judgement suspect, so is his knowledge.

[BPickerCPA]

tpainton,

What you have to do is to get a private letter ruling from the IRS that will permit you to do a late recharacterization. The IRS is fairly liberal with these rulings, and I have gotten several of them for clients.

There is an IRS user fee, as well as a professional fee if you have a pro do it for you (which I recommend since the procedure is quite technical).

Perhaps the advisor will pay for the ruling. They should, IMO.

[mbozek]

There is a simpler solution than getting an IRS private letter ruling. If you can document that you relied on your broker's advice that you were eligible to open a Roth IRA then the brokerage will be liable for your penalty taxes because the broker is a fiduciary. Reputable brokers will make customers whole for errors caused by their reps which result in adverse tax consequences. You will need to prove to the brokerage that your broker offered incorrect advice on opening a Roth IRA. Be prepared to answer the question of why you or your tax preparer did not catch the mistake when your tax return was filed.

I doubt that the brokerage would pay for a private letter ruling from the IRS since it will be cheaper to reimburse you for the tax penalities described in a prior post.

[Appleby]

the brokerage will be liable for your penalty taxes because the broker is a fiduciary

Fiduciary rules would not apply to an IRA in this case. This is more of a customer service issue. If the financial institution is at fault, and wants to make the customer whole then there are several options available, including some of those listed above. I agree that most financial institutions would rather do the right thing that to have a dragged out discussion about who is right; who can be held responsibility etc. But assuming they are not willing to claim responsibility, the question then become “ Can you hold the financial institution responsible”? Not if they provided the IRA owner with sufficient information to help him/her determine whether he/she is eligible to contribute to the IRA. Which they must in order to be in compliance with the IRA rules.

Should the financial adviser be knowledgeable about the products they sell and impart their knowledge to the investor? Definitely!!

Is a financial advisor responsible for determining whether an individual is eligible to fund an IRA? Maybe not.

Determination of investment suitability does not necessarily include determination of eligibly to contribute to an IRA.

If you really want to point fingers, they could be pointed at the IRA owner and the tax professional that prepared the tax return- Or course…The tax- return preparer would only be ware of the transaction if they were provided with the related documentation (1099-R) and/or if they were notified by the IRA owner .

tpainton , I know this sounds harsh, but the fact is, when you signed the adoption agreement on the dotted line, you very likely signed an agreement that says you are aware of the rules governing your IRA, including determining your eligibility to establish and fund the IRA …and in instances were you need to, you have obtained independent tax advice…the IRA documents also includes a detailed description of the rules , including eligibility, governing the IRA.

At this point, the options appear to be:

1) Have a serious conversation with the financial advisor about options for making you whole- give them options if they appear to need help in that area- including paying for the private letter ruling (PLR); handling the transaction as a “return of excess contribution” processed timely; handling the transaction as a recharacterization processed timely

2) Apply for the PLR on your own- bearing in mind the cost

3) Remove the amount from the IRA as a “return of excess contribution” after the deadline and pay the 6% penalty

[mbozek]

My reference was to fiduciary duty for financial advisors under state law since ERISA does not apply to IRAs. It is also more than a customer service issue if the broker violated the company compliance policy by offering tax advice or by recommending a tax product to a cleint who is not eligible for such product. The brokerage will be responsible for failure of a broker to comply with compliance policy.

Also is not an economically feasable option because the cost of submission will be greater than the penalty taxes involved - 6% excess contributions penalty plus 10% of any earnings on the contributons and ordinary income tax on the earnings.