How would you like to learn that your IRA account participated in a transaction whereby the entire value of your IRA account is deemed to be taxable to you even though you did not withdraw a single penny from your IRA account?
According to Tim Berry, JD, who specializes in helping his clients with their Individual Retirement Account (IRA) issues , this is a real concern. He published an interesting article titled “The Dummy Contract” which I believe should be read by everyone who has an IRA account. Tim’s article can be found at http://www.trustmakers.com/Asset-Protection-News/Newsletters/2010-Newsletters/06-June/IRA-Crisis.php. As an aside, if you are interested in learning more about asset protection, I believe you will find www.trustmakers.com to be a valuable resource.
What is a dummy contract? Tim describes it as a contract that is given to you by a trusted financial advisor which is written to the benefit of the financial advisory firm. These contracts are rarely read, and if read, are likely not understood. The contacts are signed because of the confidence we have in our financial advisor who is looking after our best interests. Or as Tim questions, are they? Tim’s experience has been that several IRA agreements he has seen over the years inadvertently contained language that is considered “prohibited transactions” by the U.S. Dept. of Labor and can cause the immediate taxation of the IRA account. An example of a prohibited transaction in an IRA account is where the account holder is required to sign a personal guarantee. The result of a prohibited transaction is a complete distribution and the immediate taxation of your entire IRA. And it gets worse! The prohibited transaction occurs when the brokerage agreement was signed by you. Thus if you signed the agreement 10 years ago, you will also be assessed 10 years of interest and penalty assessments.
If you would like to learn more about this issue, you should read the Dept. of Labor’s 2009-03A Advisory Opinion written in response to Tim’s letter to the DOL asking for its written opinion. If after reviewing your brokerage agreement (which you will likely have to obtain from your brokerage firm as you cannot find your copy) you discover that there was a personal guarantee given by you and if you are interested in consulting with Tim Berry about your particular situation and how to correct it, you can contact him at firstname.lastname@example.org.
We thought it was important to share this with our readers as it is a very good example of a tax landmine that is not known by many in the financial and tax communities.
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