Friday, December 22, 2006


While in the “law library” the other day reading the Fall 2006 issue of the National Association of Tax Professionals’ quarterly magazine TAXPRO JOURNAL, to which I am an occasional contributor, I came across an article on inherited IRAs by Kary Bartmasser and Neal Frankle with an important lesson in the “don’t assume” category.

Do not assume that your banker, broker, or other investment or financial advisor knows tax law.

The article, written for tax professionals, points out, “Retirement money usually involves serious dollars. Unfortunately, the people advising your clients don’t know much about it, and that poses a threat to your clients and you.”

A banker is employed by the bank and wants what is easiest and most profitable for the bank. A broker is a salesman who wants to sell you an investment that will provide him with a nice commission. They may be trained in banking law or investment law and strategy, but they do not necessarily have any training in or knowledge of what the Tax Code says you can and cannot do.

Bartmasser and Frankle recount several horror stories where a bank, mutual fund, or investment broker advised a client to do something that was totally contrary to tax law and ended up costing the client, or almost costing the client, tons of money in unnecessary taxes, interest and penalties.

Whenever you are given advice on a tax matter by a non-tax person you should always get a second opinion from your tax preparer before taking any action.

The financial advisor may not be knowingly giving you bad advice, or lying to you for his own benefit. He may just be uninformed, or ill-informed, and may be making a wrong assumption himself.

It is quite possible that your banker, broker or other advisor is not only competent, and ethical, in his own field, but also has a working knowledge of related tax law, and that the advice he gives you is correct. However, you should still run it by your tax professional before you do anything just in case.

The article also brings out the point that while the Tax Code will allow you to do something with an inherited IRA to minimize the current and/or future tax consequences, the individual rules of the account custodian, such as a bank, mutual fund or brokerage, may be stricter than the Tax Code and not permit certain actions.

If you inherit an IRA you should first consult with your tax professional on the options available to you, and the tax cost of each option. When you decide what you want to do you should check with the account custodian to see if they will be able to do it for you. If they will not you should move the account to a custodian who will permit you to do what you want.


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