IRA mishaps can be expensive
A new client and I met for the first time this past March. She was quite upset about a tax bill she was going to have to pay in April because of a problem with one of her IRA's.
She is retired and does not have a very high risk tolerance so she has kept a tidy sum of IRA money in a bank certificate of deposit. When the CD matured in early 2011, she decided not to renew the CD and instead put the IRA funds into the banks money market account. She tells me she verified verbally that the money market would be registered as an IRA and was told it would be, but the banks new paperless system provided no documentation for her to review. The monthly statements came and she saw the funds transfer from the CD into a new money market account and watched the miniscule interest accumulate as the year went on. Everything appeared to be in order.
The surprise was in her mailbox in February. She received a 1099-R indicating a taxable withdrawal from her IRA for the full amount transferred from her CD. She quickly called the bank and learned that her new money market account was an individual, non-qualified account and the transfer out of her CD was a taxable rollover. The bank has a formal procedure to deal with mistakes, and after many frustrating phone calls and meetings they finally concluded that the mistake was the clients. The bank said she was responsible for making sure they did the transfer from the CD into an IRA money market. Since the 60 day window to roll money from one IRA to another without paying taxes had long since passed, the bank told her to just pay her taxes.
As we discussed the rest of her financial planning, she asked "Is there anything else I could do?"
Without the bank taking any responsibility for the matter, the first thought was that her only recourse would be to get a Private Letter Ruling from the IRS but I doubted it would be worth the trouble and expense. While her tax bill was several thousand dollars, PLR's often requires thousands of dollars of legal bills. And there is no guarantee that the IRS would give her the relief she wanted. She resigned to pay her tax bill.
I called her this week very excited about something new I had learned in a professional journal. The article was about remedies for common IRA mistakes and one of the examples they cited was very similar to my client's situation; the bank mistakenly deposited IRA money into a non-IRA account and the error wasn't noticed until after the 60-day deadline for a tax free rollover. In the article, the problem was solved by requesting a hardship waiver and said that such requests are frequently granted.
We hope they will grant one for my client. If they do, she can amend her tax return and get her money back.
Stay tuned. I'll let you know how it all turns out.