Ineligible custodian

[Guest rim]

Is there any way to fix a situation where money has been roll-over to an "IRA" which turns out does not have a qualified custodian? What are the consequences of this?

[John G]

If you received a check from the prior custodian, you can still fix the problem by getting money to a legit IRA custodian before the 60 day grace period elapses. Don't wait to get the funds back from the non-legit custodian. You may need to borrow the funds to get the job done in the allowed 60 days. Even a partial deposit would be helpful.

If the non-legit custodian made any representation to you that you could rollover an IRA to them, you may have a legal action against them to recover your losses. What are your losses? In my view they could include the taxes, the 10% penalty, and the loss of the IRA sheltered earnings for decades. This last component is probably the largest damage to your investing. You may want to seek legal counsel.

I am interested in the circumstances that created this problem. Can you tell us more?

[Guest danmar]

Based on the precedence of a prior ruling, the outlook looks bleak for your situation. In a previous case, the Tax Court held that taxpayers who thought they were making valid IRA rollovers had to pay tax on the amounts they withdrew from their old IRAs. Those taxpayers who hadn't attained age 59-1/2 also owed a 10% penalty tax. The problem was that the amounts weren't rolled over into valid IRAs, because the trustee of the recipient IRAs was an individual, and under Reg § 1.401-12(n)(3)(i), an individual cannot act as an IRA trustee. (Schoof et al, 110 TC No. 1)(quote from RIA).

In that situation, these taxpayers had invested in bus shelters offered through an individual who was not a qualified custodian.

So, based on this, it appears that if the 60-day rollover period has already elapsed, you would have a taxable distribution that may even be subject to a 10% penalty.

[Guest rim]

I am not sure about the exact circumstances surrounding this problem, as I was just asked by a partner to research the issue. Sorry. Thank you so much for your help.