IRA Rollovers–Don’t Get Rolled in the Process

Recently the IRS failed to help out an individual who attempted to rollover an IRA properly. In this case, the person decided to go online to open the account rather than in person. He believed that he had set up the account correctly–as an IRA–when in fact he merely set it up as an individual account. A few years later the IRS caught up to the transaction, and requested that the taxes for the IRA distribution be paid. Needless to say, the individual was taken aback, as he thought there was no distribution.

The individual attempted to point the finger at the financial institution, since he believed that they should have realized his intentions and corrected the transfer to conform to the requirements. This is important since if the financial institution made a mistake, the IRS would grant a waiver. However, the financial institution did nothing wrong–they merely followed the instructions they had received electronically from the individual. Therefore the IRS ruled that the individual had to pay up. Woops!

I think that there are two lessons from this story. First, make sure you get someone who knows the proper procedure and what papers to sign when doing a rollover since if you “goof” it up, the IRS has no mercy. And second, remember just because you are doing it online doesn’t mean that it’s necessarily being done correctly. Occasionally dealing directly with an individual can ensure that these mistakes are less likely to happen, and if they do, there\’s recourse.

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