Any fix for botched inherited non-spousal IRA?

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Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Wed Jun 06, 2012 1:25 am

Does anyone have any ideas for repairing the damages resulting from an ill-informed transfer of inherited non-spousal retirement funds from a deceased friend's account at CalPers to my pre-existing IRA account at Vanguard? At the time CalPers, a probate attorney and Vanguard all failed to alert me to the special titling and separate account needed to protect tax-deferred status. My last step in the process was to call Vanguard, where I have long had a portfolio, and ask if there was anything special I needed to know before the money was transferred; they said no and "helped" me roll it into my exisitng IRA. But now I know what should have happened. So now I've filed for a tax extension for 2011, and have paid almost 37% of the $63,000 I inherited in estimated taxes since the mistake of not leaving in the name of my friend who died, for my benefit, makes the entire amount taxable in the year received.

Vanguard is acknowledging they should have caught it, as I said more than once in the (recorded) phone call that the funds were inherited; they are indicating they intend to "make me whole" but are not willing to pursue any steps that seem likely to do that. Instead they are talking about a settlement that seems not at all "whole" considering the tax payments I just made, and the permanent loss of tax-deferred earnings on the amount I'm left with. I'm not looking for legal advice, I'm looking for any experience anyone may have with any ways, of "unwinding" a transaction where not just one, but three licensed "professionals" failed me. Does anyone know of a successful private letter ruling? or ? Any ideas? Seems weird this topic would be so inflexible, when the IRS is giving so many PLR's for mistakes in other rollover issues. I don't know if anyone can help me with ideas, I'm new to the forum, so please be gentle if I'm overstepping with my inquiry.
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Re: Any fix for botched inherited non-spousal IRA?

Postby dickenjb » Wed Jun 06, 2012 9:42 am

Paging AlanS........

Seriously he is the world's expert on these sorts of issues. If he does not respond to this thread (he probably will), send him a PM.
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Re: Any fix for botched inherited non-spousal IRA?

Postby sscritic » Wed Jun 06, 2012 9:51 am

Don't you miss google?

non spouse inherited ira - first hit - don't do what you did. But it's too late now. Maybe Alan S.* has an answer for you, but
One of the most common mistakes is the assumption that the non-spouse beneficiary can move the IRA into his or her own IRA.

If handled correctly, an inherited traditional IRA can be a cash windfall. But if you don't follow Internal Revenue Service (IRS) regulations to a "T," you could end up paying big penalties and income taxes. A spouse who inherits an IRA is the only person who can co-mingle funds with their own IRAs. Everyone else must keep inherited IRAs totally separate, and may not make new contributions to these accounts.

Perhaps this thread will help the next person who inherits an IRA from a person not their spouse.

* One space, one period. You will need both for your PM if you decide to go that route.
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Re: Any fix for botched inherited non-spousal IRA?

Postby livesoft » Wed Jun 06, 2012 9:53 am

Give at least this amount of money away to charity. You can give all of it to something like a donor-advised fund from which you can dribble out charitable contributions over the next several years. At least this way you will save on taxes this year. But it's too late for 2011.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Any fix for botched inherited non-spousal IRA?

Postby pkcrafter » Wed Jun 06, 2012 1:01 pm

A probate attorney missed this? He's the one you need to be leaning on.

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Re: Any fix for botched inherited non-spousal IRA?

Postby sscritic » Wed Jun 06, 2012 1:05 pm

pkcrafter wrote:A probate attorney missed this? He's the one you need to be leaning on.

But the probate attorney wasn't representing him; the probate attorney was representing the estate (my guess, unless he hired his own probate attorney to watch what the other probate attorney was doing). What duty does an attorney owe to someone who is not a client?
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Re: Any fix for botched inherited non-spousal IRA?

Postby Default User BR » Wed Jun 06, 2012 1:29 pm

pkcrafter wrote:A probate attorney missed this? He's the one you need to be leaning on.

If the OP was named beneficiary, then probate doesn't enter into it. Such transfers are outside the probate system. That's usually considered to be a good thing, but in this case it might have been better if the IRA didn't have a beneficiary and the estate attorney and executor were in charge.


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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Wed Jun 06, 2012 3:57 pm

Wow, this whole process is impressive. What a kick to turn my computer on this morning after a late night posting and find responses! I appreciate the comments. To help with some of the issues; I (a she, not a he) was the executor for the otherwise tiny estate, which at first didn't even seem to require a probate. I hired the probate attorney when CalPers indicated they might give the funds to others (relatives,which I am not), since initially we couldn't find a beneficiary designation form, and in spite of my being the sole beneficiary of a valid will. Then, in a very confusing "Hail Mary" situation, I found a signed bene form, CalPers accepted it as valid. I had signed a form months earlier indicating that if the funds came to me, I wanted them sent to a "qualified plan" so they didn't have to withhold 20% in taxes, but this form did not look anything like the required "Safe Harbor" notice I have since seen, and my attorney didn't so much as blink, or suggest I consult an accountant - no red flags. Then I contacted Vanguard to complete the transfer, and they also failed to alert to the issue. Months later, when I realized the trouble I was in, (stumbled over the issue while prepping for tax time) I contacted the attorney's office and he told me I needed to talk to an accountant - and sent me a bill for $137! Up to that point, I was very satisfied with him. But now, yeah I'm upset with him, but also with CalPers for not providing the appropriate emphatic alert about this unique situation - they clearly also knew I was not a spouse. When I contacted Vanguard, they insisted there is no way to fix this; I should just pull the funds out of my IRA, and pay the whoppping taxes, and "yeah, sorry, we should have caught this." When I finally talked to an accountant, he immediately knew the issue, and what should have happened, and insists that any/all three should have caught it.

I do hope the fabled Alan S. logs in - apparently I am so new I'm not yet allowed to send a private message.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Alan S. » Wed Jun 06, 2012 6:50 pm

The unlikely unwinding of this error will depend on your elevating the discussion at Vanguard to their senior legal people. Whether you should spend the money to get professional representation here is questionable since the amount involved is only 63,000 and you would not front 20% of that for legal help unless you ran out of other options.

The fact that there has been no distribution of these funds is a plus since there is really no solution had you received a check made out to you. Vanguard would have a clearer path to correcting this had you transferred the funds to a new IRA rather than an existing IRA, as they then could simply correct the title to the account. See the following:

http://www.retirementdictionary.com/faq ... heritedira

But since the funds were added to your own IRA, you will have to pressure Vanguard to partition the balance in any reasonable fashion that will transfer the inherited funds to a correctly titled (including the decedent's name) inherited IRA. Investigation of how/where the process went haywire may help resolve this:
1) Did you receive a check from Calpers to forward to VG?
2) If so, exactly what was shown as the payee?
3) Did you get a 1099R? Did it show nothing in Box 2a? Was Box 7 coded G and 4?
4) Did you receive a 402f Notice from Calpers?

If so, the IRS will not yet be looking for you to report taxable income, but if you have to in the end it will be a penalty free death distribution (the 4 code).

If you did not receive a check to forward, then we can look into the transfer process (eg ACATS vre non ACATs etc). I am not very familiar with the legal requirements, but there are some requirements with respect to matching the titles on the issuing and receiving accounts.

If you still are not getting anywhere, then it's decision time to determine if it is worth it to spend money for representation. In that determination you would factor in:
1) The potential amount it could cost in relation to the 63,000
2) The odds of success
3) How soon you would otherwise distribute the funds and pay those taxes anyway.
4) And if you did report the taxable distribution, could you use the net proceeds to subsidize additional retirement contributions of your own.
5) And most importantly - did you complete any forms incorrectly and thereby contribute to the error? For example, was there an indication of spouse/ non spouse that you did not complete?

Note: If or when you decide you can't be successful, the rollover will be treated as an excess contribution to your IRA. You would only have until 10/15/2012 (rollover was in 2011) to withdraw the funds and VG would have to calculate the allocated earnings/loss on the distribution. Earnings would be taxable and subject to penalty on your 2011 return, but you already paid most of that. If you wait past 10/15 and are not successful, then you have a 6% excise tax for 2011 and another 6% once 12/31/2012 passes.

As you can see, time is of the essence for you and for VG because the longer this goes the more they will resist the procedures and signoffs they will have to complete to unwind this.
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Re: Any fix for botched inherited non-spousal IRA?

Postby sscritic » Wed Jun 06, 2012 7:29 pm

Alan S. wrote:Note: If or when you decide you can't be successful, the rollover will be treated as an excess contribution to your IRA.

Thank you Alan for such a full review. This last point was something I was thinking about, but I didn't follow the thought with a post. If I understand correctly, the whole process would be treated as a full withdrawal from the inherited IRA followed by a contribution of the same amount into her own IRA, the amount being far above the allowable amount, thus the excess. If that is the correct way of interpreting it, then if she didn't make any contribution of her own for that year and she is otherwise eligible, $5,000 (or $6,000) would be a legal contribution and only the excess above $5,000 would be the excess contribution. Is that heading in the right direction?
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Re: Any fix for botched inherited non-spousal IRA?

Postby cherijoh » Wed Jun 06, 2012 9:38 pm

Ouch what a mess. I know hindsight is 20-20, but it seems to me you were trying to do three separate things in one step:

1) convert from one type of retirement account (403-b?) to another (IRA)
2) Transfer the account into a non-spouse beneficiary name
3) Transfer the account to a different financial institution

This seems fraught with the possibility for errors!

I'm not familiar enough with 403-b plans, but could you have asked Calpers to first establish a beneficiary account for you? Then as a second step you could have requested that Vanguard do a trustee-to-trustee transfer of the properly titled inherited IRA. Under these circumstances, there would have been a clear paper trail and each company would be handling a process with which they were familiar.

My brother and I inherited my Mom's traditional IRA (which was originally my Dad's). We had no issues with the transfer process - but the original IRA was at Vanguard and we were creating inherited IRAs also at Vanguard. I simply contacted Vanguard, explained the situation, asked what form to use and what documentation (e.g., death certificate) was required.

Good Luck! I hope you are sucessful in straightening this out.
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Re: Any fix for botched inherited non-spousal IRA?

Postby sscritic » Wed Jun 06, 2012 10:22 pm

Probably not a 403(b), but the defined benefit plan for state employees. When my wife died, she had a 403(b) at TIAA-CREF and her defined benefit plan in the UC system. Since this was a deceased to spouse transfer, the issue of keeping her name on the account didn't come up. I opened a Rollover (conduit) IRA at TIAA-CREF which accepted the 403(b) from within house and the value of the UC defined benefit plan. It's been a long time, but I just sent some letters and UC and TIAA-CREF worked out the rest themselves.

Note that with a defined benefit plan, there are often three sets of rules: death before eligible age for retirement; death after eligible age for retirement but before retirement; and death after retirement. In the latter case, the only money would be payments to someone named as a joint participant in the retirement, so this was probably death before retirement of some kind.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Alan S. » Thu Jun 07, 2012 12:35 am

sscritic wrote:
Alan S. wrote:Note: If or when you decide you can't be successful, the rollover will be treated as an excess contribution to your IRA.

Thank you Alan for such a full review. This last point was something I was thinking about, but I didn't follow the thought with a post. If I understand correctly, the whole process would be treated as a full withdrawal from the inherited IRA followed by a contribution of the same amount into her own IRA, the amount being far above the allowable amount, thus the excess. If that is the correct way of interpreting it, then if she didn't make any contribution of her own for that year and she is otherwise eligible, $5,000 (or $6,000) would be a legal contribution and only the excess above $5,000 would be the excess contribution. Is that heading in the right direction?


Yes, that's correct. Up to 6k of the rollover might be retained as a regular contribution if otherwise eligible. It could be deductible or non deductible depending on MAGI requirements. And if she had already made a Roth contribution, she could elect to retain that and remove the entire disallowed rollover.
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Thu Jun 07, 2012 2:22 am

Thanks so much for all the input, I really appreciate all the conversation and thoughtful feedback. Here's more info in response to some of the points raised. The check went directly from CalPers to Vanguard, made out to Vanguard with (amazingly) no reference to the deceased person. But the tax forms were all correctly coded (4G) so the IRS at this point would have no clue. I've also recently received an annual statement from Vanguard that has no indications that anything's amiss; it looks like I just moved money from another retirement account into my IRA at Vanguard, as I've done in the past with other transactions. If I'd never learned about it and raised the issue, the accountant says the likelihood of anyone ever noticing was incredibly slim to none. When I first called Vanguard, I genuinely thought they'd just move it out to a new account and put the right names on it. I've also asked Vanguard to contact CalPers to see if the transaction could be retracted and then a "do over", but they apparently are not willing to ask for this They seem to want to keep it quiet, not have to acknowledge to anyone else that they made a mistake, which makes me wonder how many more mistakes are lurking out there. The other thing that didn't happen because I didn't know what I was dealing with, was a RMD for 2011 (my friend died at the end of 2010, he had not yet retired) I've had a couple of conversations with a tax attorney, but am reluctant to throw much more good money after bad at this point. He has talked to one attorney at Vanguard, says it was very unsatisfactory, and they will not give out a direct phone number, he has to wait for Vanguard to call him. The article referred to by Alan S. was very interesting, I'm printing that out for the attorney; I can see where if the money had been sequestered it would be an easier issue, but at the time of trustee to trustee transfer, Vanguard endorsed just putting it into my existing account, that was "easiest."

My understanding is that most likely the entire amount, plus earnings to date of withdrawal, will have to be withdrawn as excess contribution, with no penalty as long as I complete by October/extension date. I am not eligible for any portion to stay in my IRA, as I had an employer plan, this is an old IRA from back when I was self employed, I've made no contributions for several years. I have not touched the account yet, in spite of directions from Vanguard that I need to withdraw/move these funds; I figure the minute I pull it out and put it into a regular taxable account, which Vanguard says is the only place it can go, any hope of remedy is over. Clearly, my time is running out. Again, thanks everyone; I'm listening!
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Re: Any fix for botched inherited non-spousal IRA?

Postby MarkNYC » Thu Jun 07, 2012 2:29 pm

keeptrying,

There are numerous IRS rulings that allow for relief for a defective rollover. Most of those rulings pertain to violations of the 60-day rule rather than a transfer of funds into an improperly titled IRA account, but it seems reasonable that the same principles should apply. For example, the IRS will extend the 60-day rollover period in cases where failure to do so would be "against equity or good conscience, including ... events beyond the reasonable control of the individual." Sec 408(d)(3)(I) In fact, the IRS will automatically waive the 60-day rule when 4 requirements are met: (1) the distribution occured after 2001 (2) the taxpayer properly instructed the financial instution(s) concerning the rollover and did everything it required (3) solely because of error by the financial institution, the rollover was invalid and (4) the rollover was completed within one year after the distriibution. (Rev Proc. 2003-16). In situations where the automatic waiver did not apply, numerous private letter rulings have granted a waiver where a timely rollover could have been completed if not for errors made by the financial institution. (PLR's: 200401020 Oct 8, 2003; 200421008 Feb 27, 2004; 200524036 June 17, 2005)

In addition, the Tax Court has granted relief for imperfect rollovers if the taxpayer acted with full knowledge of the legal requirements, took all steps to comply that were reasonably within his/her control, and achieved "substantial compliance". I think you could make that case here.

Nevertheless, I think the chances of getting this corrected aren't very good. You would have to get in touch with someone at Vanguard who is high enough to have decision-making authority in this type of situation. You would have to convince that person that based on previous rulings, the IRS would allow corrective action in this case. Since you haven't yet withdrawn from the IRA account, it would not seem that difficult for them to transfer the $63,000 (plus allocated earnings) to a newly established, inherited IRA account. And since the 2011 1099R that Calpers issued did not indicate any taxable income, you would likely not have to deal with any IRS reporting discrepancies. You don't have much time, but I think it's worth another try.
Last edited by MarkNYC on Thu Jun 07, 2012 5:05 pm, edited 1 time in total.
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Re: Any fix for botched inherited non-spousal IRA?

Postby dickenjb » Thu Jun 07, 2012 4:04 pm

keeptrying wrote: I am not eligible for any portion to stay in my IRA, as I had an employer plan, this is an old IRA from back when I was self employed, I've made no contributions for several years.


Everyone with earned income is eligible to contribute to an IRA. It just isn't deductible for some folks.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Watty » Thu Jun 07, 2012 5:46 pm

dickenjb wrote:
keeptrying wrote: I am not eligible for any portion to stay in my IRA, as I had an employer plan, this is an old IRA from back when I was self employed, I've made no contributions for several years.


Everyone with earned income is eligible to contribute to an IRA. It just isn't deductible for some folks.


or it will be deductable if you can keep your modified AGI below the limits.

http://www.irs.gov/retirement/participa ... 35,00.html
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Re: Any fix for botched inherited non-spousal IRA?

Postby jej » Thu Jun 07, 2012 7:35 pm

keeptrying wrote:.........
Vanguard is acknowledging they should have caught it, as I said more than once in the (recorded) phone call that the funds were inherited; they are indicating they intend to "make me whole" but are not willing to pursue any steps that seem likely to do that. .......



I can't help with the original issue. Looks like others have.

I wanted to comment on the statement quoted above. It looks like you are in California. If you are referring to Vanguard having recorded the call, that's fine, and I expect copies will be discoverable if you ever litigate.

If you recorded the call, be advised that California law makes that problematic unless you get the permission of all parties. In advance. That's why Vanguard and others start out with telling you that you are talking on a recorded line. You would have needed to do the same, as in "yes, I am recording the call, too." If memory serves, this is dealt with at California Penal code section 632 et seq., and there are problems both with making the recording and with using it subsequently for any purpose. Its been a few years since I dealt with the intricacies of this statute, but wanted to warn you and others here not to record California telephone calls unless you follow the rules.
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Re: Any fix for botched inherited non-spousal IRA?

Postby celia » Thu Jun 07, 2012 9:16 pm

Keeptrying, Were you aware at the time you found out you were a beneficiary or executor that non-spouse inherited IRAs have Required Minimum Distribution (RMD) requirements each year after the person died? If so, it shouldn't have seemed reasonable to you to combine the inherited retirement account (note, it was not an IRA, but probably a qualified retirement plan) with an existing IRA. How can anyone determine your yearly required distribution if you co-mingle the money with something else? I believe this should have been your responsibility to find out. After you had assumedly transferred the money to a new inherited IRA, the custodian (Vanguard) would most likely have set up a distribution plan. You cannot continue for this money to be tax-deferred until you reach age 70. You must now pull money out yearly or all at once.

Now that you know this, is it worth the expense to force it to go into an inherited IRA account? You will have to pay taxes on the yearly distribution, possibly a Vanguard yearly IRA custodian fee, a possible penalty for adding excess contributions to an existing IRA if it is not removed by 10/15/2012, attorney fees, re-do your tax return, and spend more time on this. How about estimating the dollar amount this will "cost" you. Possibly it will be better to move the funds to a taxable account and be done since the IRS may or may not rule in your favor if you still want to unwind this.
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Re: Any fix for botched inherited non-spousal IRA?

Postby JamesSFO » Thu Jun 07, 2012 10:51 pm

@op - Much sympathies, these sorts of "gotchas" in our tax system strike me always as needless complexity. Sounds like you have a lot of good advice here about what can be done, hope you give us an update in 30-60 days about what happens.
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Sat Jun 09, 2012 3:15 am

Thanks for all the latest feedback; appreciate all the effort and comments.

To MarkNYC: Yes, my thinking was exactly the same, in fact I read this very item to the person I was dealing with at Vanguard; the response was that it doesn't apply to my situation, only to rollovers that took more than the 60 days allowable...they insist that because there's not a single PLR to be found that deals with things botched in the way mine was, there's no good odds in pursuing it. (!) I've also learned that it's likely that the exceptions just haven't evolved yet for this kind of transaction because they are so new; apparently until just a very few years ago (2006?) for anyone but a spouse, the inheritance would be fully taxable. It sounds like the IRS gets overwhelmed with PLR requests, and carves out a clarification to reduce the paperwork/appeals coming in - there's changes predicted on my topic, but not enough action yet to make it happen in time to help me.

To dickenjb and Watty: I think I just worded things badly. Due to the income limits and employer coverage, I can't make any deductible contributions for 2011; so the accountant says the 63,000 that went in coded as a qualified tax deferred receipt of funds must be all removed, coded as "excess contribution"

To jej: thanks for the caveat, but it was Vanguard who did all the recording, which I kind of regret consenting to now; they have not provided copies or transcripts as I have requested. In hindsight, I think I should have found a way to record as well, (with notice, of course)

To Celia: I knew 0 about inherited IRA's at the time; I've learned all this after the fact, including that apparently the first RMD should have been paid to me before the funds were even sent to Vanguard. While I firmly wish I had learned all this stuff before things went bad, people who are in the midst of a loss aren't doing their most analytical thinking. That's why executors hire attorneys, as I did, and check with their financial advisers, as I did. The group responding in this forum are exceptionally well informed; I think you're underestimating how obscure this information is. I have been calling other brokerage houses, financial institutions and even CFP's in an effort to decide whether/where to move my portfolio, as my confidence in Vanguard is badly damaged; I have been stunned to have all but one (a very expensive CFP) provide the same misinformation and adamantly insist that the amount could go directly into an existing IRA. Bottom line; the financial people are not yet up to speed on this topic, it is not well incorporated into the standard protocols these companies are using when you or I call in. If you have access to the higher level in a company, the really informed guys know; but the ones taking the phone calls don't.

Lastly, to JamesSFO: I agree heartily; it shouldn't be so hard to get the right information, to be able to do things right. I do sincerely hope this discussion helps some other readers avoid the black hole I fell into.
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Re: Any fix for botched inherited non-spousal IRA?

Postby markpa » Sat Jun 09, 2012 4:12 am

I would keep escalating to Vanguard. Fedex overnight a written letter to an executive level manager.

I would write that per the IRS requirements, the correct box was checkmarked for IRS purposes (key point!), the check never touched your hands, and it went directly to the successor firm. However, despite you mentioning it was an inheritance, Vanguard incorrectly put it into your own name and said on the phone that it was the best method. The error may have been compounded by the payor sending it without the estate name on it, however it is now in Vanguard's hands to fix.

please ask what steps they need you to complete within the next 30 days in order to roll back the transaction and redeposit. I have a hunch they can open a new account with the correct title, and do an internal journal transaction with zero tax reporting or implications. Or, have them do the jorunal and report a distribution from your account, then just write in to the IRS when you get a bill disputing this. Show them the will, the ira, and the correctly titled IRA, and just respond to the form stating that a financial institution made an error initially but all tax reports were checkmarked correctly. If that doesn't make the bill disappear, you have pretty good odds of getting an IRS agent on the phone likely has the power to close any mailed tax bill.

Then get the party that wrote the check involved, and ask what they can do for you since they made no mention of the estate on the check. Can they request that it be returned as unauthorized? disputed? Investigate it as fraud and ask for the funds back from Vanguard for a do-over? I'm certain they CAN do all of these things, you just need someone on your side. Surely if Vanguard put a check for your IRA into your father's account or son's account (same anme and address) they can xfer it over, even if the error isn't caught until long after tax reporting season....

I've had brokers fix some pretty wild situations for me in the past: one two weeks after I made a mistake trade order online, when I meant to set a stop loss selling price but didn't resulting in an immdiate sale with ten thosand $$ capital gains. The other was when I asked for a buy of 10k shares of a corporate bond at an initial launch price, (they thought I said 10k dollars worth.), and they had to go out of pocket to buy the remainder for me at a significantly higher price a month later.

I also know of a brokerage that verified a customer's a $57k counterfeit customer check via phone. They told my customer the funds were in the account, but they skipped an internal protocol of calling the account holder before verifying checks over $10k. The checks were counterfeit and dishonored, however the company saw policy had been broken by their employee and funded the $57k via wire xfer out of an errors and omissions budget, with zero chance for recovery from the fake check writer.
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Sun Jun 10, 2012 1:39 am

markpa wrote:I would keep escalating to Vanguard. Fedex overnight a written letter to an executive level manager.

I would write that per the IRS requirements, the correct box was checkmarked for IRS purposes (key point!), the check never touched your hands, and it went directly to the successor firm. However, despite you mentioning it was an inheritance, Vanguard incorrectly put it into your own name and said on the phone that it was the best method. The error may have been compounded by the payor sending it without the estate name on it, however it is now in Vanguard's hands to fix.



Thank you for these suggestions; the approach you're describing makes great sense to me, and I plan to follow up in just the way you're suggesting; can't hurt, might help. It does seem there surely have to be ways they can correct internal errors; they say their hands are tied by worries about auditing by FINRA, etc...my feeling all along has been that they're making this too complicated, of course they can correct a mistake. Thanks again for your thoughtful input, it's intimidating standing up to such a huge organization.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Patchy Groundfog » Sun Jun 10, 2012 7:45 am

keeptrying wrote:To Celia: I knew 0 about inherited IRA's at the time; I've learned all this after the fact, including that apparently the first RMD should have been paid to me before the funds were even sent to Vanguard. While I firmly wish I had learned all this stuff before things went bad, people who are in the midst of a loss aren't doing their most analytical thinking.



I first learned about the tax implications of inherited non-spousal IRAs on this forum a couple of years ago. At present, two-thirds of what my children would inherit is in a traditional IRA, and this has worried me. Since Vanguard is the custodian I have assumed that they would provide guidance on retitling, RMDs, etc., but this thread has given me pause.

I have included in the "Upon my death..." binder of instructions a one-page explanation on inherited IRAs that I copied from somewhere, and told them more than once to get tax advice when they inherit, so I guess that is all I can do.
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Re: Any fix for botched inherited non-spousal IRA?

Postby ingenue » Sun Jun 10, 2012 1:16 pm

When my brothers and I established Inherited IRAs at Fidelity to receive the benefits from my father's retirement account, we did have a transaction error. My father's account custodian put my new Inherited IRA account number in the memo of my brother's rollover check. My brother and I have similar first names and Fidelity put his funds in my Fidelity Inherited IRA account. Fidelity immediately acknowledged they should have caught the error on the check they received. Fidelity made the corrective transactions.

I was going to try to use Vanguard for our Inherited IRAs, but Vanguard's forms for opening an IRA didn't have a clearly defined procedure for opening an Inherited IRA to accept a direct rollover. I called Vanguard to ask how to set up such an account, but Vanguard told me my father's retirement account had to be converted to an Inherited IRA for me while the funds were still with my father's trustee/custodian (Mercer), and then Vanguard could acquire the account as a trustee-to-trustee transfer. Mercer would only cut a direct rollover check, and Vanguard apparently would not accept one. Fidelity's forms and their customer service clearly accomodated the transaction by the method I needed to use. I went with Fidelity. I was left with the impression that Fidelity surpassed Vanguard in expertise and established procedure for setting up Inherited IRAs.

That impression is reinforced when I see that Vanguard can't untangle an error with some similarity to one that Fidelity easily untangled for me. Vanguard Concierge Services handles their Inherited IRAs, so if OP is not already talking to that department, she may (or may not) find improved assistance in that department.

The way I see it, OP is being pressured to authorize a transaction that will make the taxable event "her decision". Once that happens, the questions--Who is responsible for the errors? Can the errors can be corrected? How?--become moot. The parties that made those errors unload any responsibility they may have to make the OP whole.

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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Tue Jun 12, 2012 1:44 am

To Patchy Groundfog: And you picked things up on the forum because you had a reason for the info to stick. I think your concern with your family arrangement is valid; given what I know now, I'd say the clearer you can be for your kids, the more likelihood they will remember the clues when the time comes. The papers I had from CalPers say really vague things: "(taxes) can be avoided by electing to have the taxable portion of the benefit rolled over to an IRA" and "I elect to have the taxable portion of the lump sum benefit payment rolled into the following Individual Retirement Arrangement (IRA)" Who would think this means anything but a normal IRA? Since you're so organized and have the 'Upon my death" binder (what a gift for your family) I'd recommend you add a really emphatic statement like a "black box warning" about 1) the substantial benefits of keeping the money in a tax deferred arrangement and 2) in order to do that, the absolute necessity of opening a NEW account which is titled in the critical way (with your name as well as theirs as your beneficiary) Vanguard even has all the forms for this; they just didn't bother to tell me about them; if your kids know to ask and insist, I know they can get to the right information. Some of the time frames get critical as well; see an interesting article at:
klenklaw.com/articles/article12 "Converting an IRA, 401K and other Qualified Plans into an Inherited IRA"

To Ingenue: Unfortunately, the call I made was to Vanguard's "Concierge Services", that's who blew it. And yes, from very early on they were recommending I pull out the "excess" before April 15, when it turned out if I filed for an extension I had more time to try to figure things out (not that I'm getting far with my efforts) But they were very focused on the removal; when that didn't happen, they got a lot less talkative. Thanks for the feedback about Fidelity, does sound like a different attitude.

I did just send off, via overnight mail, letters to higher up managers whose names and pictures I found on the Internet; we'll see if anyone responds.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Alan S. » Tue Jun 12, 2012 7:31 pm

Keep the pressure on Vanguard, at least until October when your 2011 return is due and the extended due date occurs on the same date.

Note that the IRS does NOT have the authority to allow rollovers on inherited IRA assets. That's why there are no PLRs on the subject and therefore no solution once you have taken a distribution. So taking a distribution would be fatal with respect to preservation of the inherited IRA and you are in much better shape than someone who received an erroneous distribution. Vanguard is your problem right now and they should have the resources to know how best to correct the problem and do another direct transfer of an appropriate amount to a correctly titled inherited IRA.

Part of Vanguard's challenge here is that instead of being a fully non reportable IRA to IRA transfer, your direct rollover came from a qualified plan (CALPERS) and that produces a 1099R from CALPERS and a 5498 from Vanguard which reports receipt of a rollover contribution in Box 2 (check your files for these forms). That also results in your 1040 showing this distribution/rollover. All this has the potential to alert the IRS if there is a mismatch of title on the two accounts, but in most cases the IRS would miss that entirely . Nonetheless, this results in concerns at Vanguard since they would have to go back and generate a 5498 on the new inherited IRA showing the 12/31/2011 balance and indicated RMD for 2012. However, the IRS 5498 instructions indicate that if an IRA custodian reports a rollover contribution that was not eligible for rollover on the first 5498, they must revise the form to show the amount as a regular IRA contribution even though 63k far exceeds allowable regular contributions. If Vanguard has done this, they dug themselves (and you ) a deeper hole to climb out of by notifying the IRS that you have a large excess IRA contribution.

At this point, check to see what 5498 forms you have from Vanguard as an indication of where they must go from here if they sincerely want to equitably resolve your problem.
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Re: Any fix for botched inherited non-spousal IRA?

Postby celia » Wed Jun 13, 2012 2:13 pm

keeptrying wrote:The papers I had from CalPers say really vague things: "(taxes) can be avoided by electing to have the taxable portion of the benefit rolled over to an IRA" and "I elect to have the taxable portion of the lump sum benefit payment rolled into the following Individual Retirement Arrangement (IRA)" Who would think this means anything but a normal IRA?

This means you can roll it over into an IRA titled the same as how the CalPers account was held, ie. IRA of (friend's name), not any IRA you want. In fairness, the vast majority of CalPers distributions are most likely like this. The other reason many people in the financial industry don't think of this properly is that IRAs only started in the 1980s, I believe. Many elderly did not have much employment time after that to contribute and the original contribution limit was $2,000. So the value in IRAs was relatively small (especially if an elderly person had been taking distributions). I was trustee for a relative who have been withdrawing her RMDs for years. At the time of death, the balance was under $10,000 and there were multiple heirs. My point is that those who process paperwork for these accounts have not seen large account balances, so that it is (was) often not worth anyone's time to move it to beneficiary IRAs and calculate yearly RMDs. As time goes on and account balances grow and people are more informed, the information you were lacking will become more widely known.

keeptrying wrote:I did just send off, via overnight mail, letters to higher up managers whose names and pictures I found on the Internet; we'll see if anyone responds.

If you wrote to Jack Brennan, you should be getting a quick resolution.
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Re: Any fix for botched inherited non-spousal IRA?

Postby norookie » Wed Jun 13, 2012 2:27 pm

:shock: tag for later.
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Re: Any fix for botched inherited non-spousal IRA?

Postby celia » Wed Jun 13, 2012 2:32 pm

norookie wrote::shock: tag for later.

norookie, Why not bookmark this page in your browser instead? If everyone who wanted to find this page later made an "empty" comment, the thread would become very "watered down".
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Thu Jun 14, 2012 3:01 am

I've confirmed my letter has been delivered to Vanguard, but I've been cautioned that anything that goes to the special address for registered and certified mail "has to be scanned in" and then takes a slow re-route to the addressee. We'll see.

To Alan S.: In the meantime, I've perused the 2011 Form 5498 I recently received (the only one I have) and it lists my "rollover contribution" in box 2, the amount we're discussing. But I also have just noticed another surprise: In March of 2011, I did another "trustee to trustee" transfer of a small IRA I had at another bank, (I was planning to consolidate everything at Vanguard; I'm rethinking that!) which for some unexplained reason Vanguard opened into a new IRA, with a new account number, instead of adding to the one I've had there for years; that amount is not identified/listed as a "rollover contribution" for 2011. That really puzzles me, hope that's not another problem! But the total of this "new" IRA account # shows correctly as that smaller amount, plus this inherited amount. (Hmmm...if they could just move that smaller amount over to my old IRA, and re-title this one.....) At this point, I have reported nothing to the IRS, as my return is not filed yet, nor have I pulled the disputed amount out, and Vanguard hasn't done the revised report you refer to. The explanation of what will happen, according to Vanguard and my accountant as I understand it is: when I pull the $63,000 out, in 2012, as excess contribution, Vanguard then reports that distribution on forms for 2012 (as that's when that withdrawal will actually happen) but I have to go ahead and report it on my 2011 taxes, even though there would not yet be any corroborating report from or to anyone, including the IRS. If I had already filed my taxes, I would do an amended return for 2011. Then on my 2012 taxes, I attach an explanation that the amount on that new report of income from Vanguard was already accounted for on my final 2011 return. Pshew!

And to Celia; I don't think CalPers ever told me how my friend's title was held; they refer to it as a "death benefit". It was his pre-tax contributions to their pension plan and an employer(required) "contribution." They identified and wrote a separate check, which was mailed directly to me, for a small amount of "post tax" contributions, which apparently don't have to be reported. My research since confirms that even though it may not technically be an IRA at the time of death, it's tax deferred status can be preserved with a "direct rollover" to an IRA. So it gets called an "Inherited IRA" even though it apparently wasn't an IRA before it came to me (well, and it still isn't, thanks to this mess) And you're right, now people are building huge IRA's, and some of those will run into these same missteps. Most people still seem to think of an IRA as a minor part of an estate, and expect to leave it to their spouse; but the odds are now rapidly increasing that most IRA's will go to someone other than a spouse, and thus have these different rules; and yet the system isn't up to speed on the special rules. Tread carefully, everyone.
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Re: Any fix for botched inherited non-spousal IRA?

Postby celia » Thu Jun 14, 2012 3:49 am

keeptrying wrote:At this point, I have reported nothing to the IRS, as my return is not filed yet, nor have I pulled the disputed amount out, and Vanguard hasn't done the revised report you refer to.

When you received the 1099R and 5498, the IRS received their copy, so I'm sure they're anxiously waiting to see how your 1040 is filed. :wink:

keeptrying wrote:The explanation of what will happen, according to Vanguard and my accountant as I understand it is: when I pull the $63,000 out, in 2012, as excess contribution, Vanguard then reports that distribution on forms for 2012 (as that's when that withdrawal will actually happen) but I have to go ahead and report it on my 2011 taxes, even though there would not yet be any corroborating report from or to anyone, including the IRS. If I had already filed my taxes, I would do an amended return for 2011. Then on my 2012 taxes, I attach an explanation that the amount on that new report of income from Vanguard was already accounted for on my final 2011 return.

I think this is reported similar to how a IRA re-characterization is done. FYI, Joe could convert his traditional (tax-deferred) IRA to a Roth in 2011. He would owe taxes on the amount that was converted. If he finds that he can't afford the taxes (or at least all of them), he can re-characterize all or some of the Roth back into the traditional IRA until April 15 of the following year. (This is some-times called a do-over.) He will receive a 1099R showing the amount converted in 2011, then another 1099R showing the amount of the original conversion that was re-characterized in 2012. Since he re-characterized by April 15, his 2011 tax return can reflect both transactions even though he and the IRS won't get the 1099R for the 2012 re-characterization until January 2013.

Note to anyone converting to a Roth:
I strongly recommend you always do a conversion into a new/empty Roth. If it should later turn out that you want to re-characterize (eg, the value of the shares become worth significantly less than they were at time of original conversion), the IRS-required calculations will be much cleaner.

keeptrying wrote:. . . the odds are now rapidly increasing that most IRA's will go to someone other than a spouse, and thus have these different rules; and yet the system isn't up to speed on the special rules.

Don't forget that the first spouse to die can leave their IRA to the second spouse who can merge them into his/her own IRAs, just as if they were his/hers all along. However, when the second spouse dies, if he/she didn't re-marry, then IRAs ccango to non-spouse beneficiaries. So I'd say over half the time IRAs are left to non-spouse beneficiaries (when second spouses and single people die).
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Tue Jun 19, 2012 1:14 am

Yes, it sounds like the record keeping follows the same format as Celia describes; I had a time wrapping my head around it, but the accountant seems very familiar with the process, so at least that part should run smoothly (much easier to part with your money than to hang on to it, it seems) I'm amazed at how many "cautionary" articles I am now turning up about this topic, including some good "alerts" on this forum from some time back. This group seems to do a great job of trying to alert people and share their knowledge; if only I'd known to look here, or that I needed help!

No response yet from Vanguard.
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Re: Any fix for botched inherited non-spousal IRA?

Postby exigent » Tue Jun 19, 2012 11:47 am

Wow. I'm no expert, but this sounds like malpractice on the part of the attorney that was advising you. Best of luck, and please keep updating as things develop.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Alan S. » Tue Jun 19, 2012 3:50 pm

keeptrying,

Just noticed your post of 6/14 - no, that prior IRA to IRA transfer is not a new problem, as being an IRA to IRA there should be no reporting of a rollover received on the 5498. The 5498 therefore with respect to that transfer only shows the year end balance.

Further, looking back I see that Calpers did not indicate your status as beneficiary on the check they directed to VG. Whoever processed this incorrectly handled it like they would for a spousal beneficiary doing a rollover to their own IRA account. This brings Calpers into the loop as a partially negligent party and that is what VG will likely say, but this is useful only if Vanguard does not step up in time and you decide to undertake legal remedy. In that case you would consider Calpers and VG as co defendants since VG's deposit of the check into your owned IRA would likely not have happened if Calpers had made out the check correctly showing your beneficiary status.

For now, just keep following up with Vanguard, and it may also be a good idea sending a letter to Calpers explaining how their check format has contributed to VG making a fatal error by depositing into the incorrect account that could result in immediate taxation of your inherited IRA. You might tell them you have asked VG to rectify the error, but if they refuse you are reserving your right to hold Calpers responsible. Now you are probably thinking "is there a benefit of Calpers or VG discussing this between them?" That's hard to say, but in the unlikely event that one wants to contact the other, at this point I would give them permission to do so. But I doubt that they will propose that.
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Thu Jun 21, 2012 2:21 am

To Alan S. - Yes, CalPers definitely contributed to the problem, and that part makes no sense, considering there'd been months of discussion and wrangling between them and my probate attorney about CalPers initial stance that I would not/could not be the beneficiary precisely because I was not spouse or relative and they had no valid bene form on file; at the last moment, I found a properly signed and witnessed beneficiary form(indicating my relationship was "friend") and once they decided it was valid, they were then in a rush to disperse the funds, and failed to precede the distribution with the required "Safe Harbor" notice (which I'd like to think would have been sufficient to alert me, but who knows). But the facts were right in front of them. But equally frustrating is that the attorney I was paying to do all the conversation with CalPers, (who also clearly knew I was not a spouse) also never raised the issue and clearly just didn't know what I needed him to know about.

When I recently contacted a new attorney/tax specialist, he immediately asked me to sign an authorization for Vanguard and CalPers to communicate; he has made Vanguard aware of it, but to the best of my knowledge, they have yet to contact CalPers. All indications are that they have no intention of pursuing anything to do with unwinding this transaction, the only efforts made so far have been to offer me a pretty puny sum that wouldn't begin to cover just my first go-round with taxes, especially when you consider that any funds they pay me as a settlement will also be fully taxable! Hands down, it would by far be best for me if things unwound and I ended up not with money from Vanguard, but just a proper, defensible inherited IRA.

Now there's at least a hint that someone at Vanguard has read the recent letters I sent; my new attorney got an e-mail from the assigned Vanguard staff attorney asking if he was/wasn't representing me; they were "confused" about what was going on because of a letter they had received from me....when I described the letter I sent, "my" attorney got quite a kick out of their "confusion", but thought it was telling that no one from Vanguard is reaching out to me in response to the letter, to try to smooth the waters and see that I'm OK, especially considering the multiple times they have already confirmed their error - not like they'd let the cat out of the bag by mistake if they talked to me! Really bad public relations, in my opinion. I'm still dumbfounded that this huge business is so focused on the short term cost to them that they are completely missing the boat, at least with me, of the big picture, long term costs of this incident. Years ago, when studying business admin, I remember reading that one dissatisfied customer tells their story to 15 times as many people as a happy customer, and they tell it louder and with more conviction. Hmmm...sounds like what I'm doing!
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Re: Any fix for botched inherited non-spousal IRA?

Postby JamesSFO » Thu Jun 21, 2012 10:13 am

Yep, it's a tough one all around though sounds like there were plenty of screw ups to go around: CalPers, Vanguard, your original attorney...
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Thu Aug 30, 2012 2:51 am

An update for all who were so helpful in offering ideas. It's now a couple of months later, and the lawyers are communicating at a dribble with each other, with an offer from Vanguard, which no longer includes much of what they originally indicated they would/could do. The lawyer originally assigned to this case just left Vanguard, so we're now dealing with a new one learning the case. I have had absolutely NO response to certified letters I wrote to the CEO and four division heads other than one very minimal response from one mid-level manager who seems to have been passed one of my letters, assuring me his staff was working on this, "contact them, not me"....N aot a single recipient has been diplomatic enough/smart enough to apologize, or offer concern for me as a "valued" customer. My original contacts at Vanguard repeatedly assured me they owed me a fiduciary relationship and "of course" would "make me whole", but the only response I am seeing now is them trying to keep to the bare minimum they can get me to settle for by dragging this out endlessly. Not a word of concern or inquiry about my welfare. My lawyer says that Vanguard's refusal to cooperate with his ideas about trying to "re-do" with CalPers eliminates any possibility there; if Vanguard won't cooperate in tax reporting, or returning the funds to CalPers, we're sunk on that idea.

Needless to say, I am completely disillusioned with Vanguard, and don't believe I'll ever be comfortable again having my funds with them, which makes my life way more difficult; thinking about how to move my entire portfolio. I still am having huge cognitive dissonance over the difference between my expectations that Vanguard would behave in an honorable and ethical way, vs. the reality I am experiencing with them. They are not the company I thought they were. Think long and hard about what this says about how they would treat you if/when they make an error in your account. Thanks everyone for your thoughtful ideas and effort to help.
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Re: Any fix for botched inherited non-spousal IRA?

Postby dickenjb » Thu Aug 30, 2012 6:50 am

Disappointing.
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Re: Any fix for botched inherited non-spousal IRA?

Postby JamesSFO » Thu Aug 30, 2012 8:15 am

Sorry to hear that and while that is disappointing I do think though that you should remember to properly direct some of the frustration back to CalPers and your original attorney, both of whom are also responsible for this mess.
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Re: Any fix for botched inherited non-spousal IRA?

Postby kaneohe » Thu Aug 30, 2012 10:07 am

JamesSFO wrote:Sorry to hear that and while that is disappointing I do think though that you should remember to properly direct some of the frustration back to CalPers and your original attorney, both of whom are also responsible for this mess.


To me one of the lessons here is that we all individually also need to take some effort to be involved and educated and not to assume that everybody else is knowledgeable or understands our problem. You can find cases everyday when speaking to customer service reps where, unfortunately, if you don't know what the answer should be before you ask the question, you can be easily led astray. It can be a bad rep,poor training from their supes, how you ask the question (info may not be complete & reps may assume something you didn't intend: e.g. you say "inherited" but don't say "non-spousal inherited" ). The easy ones are where you know you don't know.......you can google or ask a question on Bogleheads to get educated. The dangerous ones are when you don't know you don't know something that you should.

KInd of like crossing the street in a crosswalk.........the driver is responsible if he hits you but you're the one who is going to suffer. Better to assume he's not going to stop..........
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Re: Any fix for botched inherited non-spousal IRA?

Postby tfb » Fri Aug 31, 2012 12:37 am

cherijoh wrote:Ouch what a mess. I know hindsight is 20-20, but it seems to me you were trying to do three separate things in one step:

1) convert from one type of retirement account (403-b?) to another (IRA)
2) Transfer the account into a non-spouse beneficiary name
3) Transfer the account to a different financial institution

This seems fraught with the possibility for errors!

I'm not familiar enough with 403-b plans, but could you have asked Calpers to first establish a beneficiary account for you? Then as a second step you could have requested that Vanguard do a trustee-to-trustee transfer of the properly titled inherited IRA. Under these circumstances, there would have been a clear paper trail and each company would be handling a process with which they were familiar.

I agree with this analysis. The OP kept talking about an inherited IRA except it wasn't an inherited IRA. One had never been established. It was distribution from a public pension plan to the beneficiary of a deceased participant. The pension plan makes lump sum distributions all the time. Distributing to a personal IRA is quite routine. Vanguard receives distributions from employer plans all the time. Accepting a check into an IRA is also routine. Except this time the OP was trying to change the type of the account, the title on the account, and the institution that holds it all at the same time. Go slow. Do one thing at a time.
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Fri Aug 31, 2012 2:05 am

This was definitely an example of "not knowing what I didn't know," which makes it very difficult to get to the right answers - you just don't recognize when things are going awry. Won't happen to me again, at least on this topic, but it's been a painful learning curve. CalPers kept referring to the funds as a "death benefit" and only indicated that when they were ready to pay out, they would not have to withhold taxes if I arranged to have it put into a tax deferred account. So I called Vanguard to advise the check was coming,told them it was inherited funds, and asked if my existing IRA would serve the purpose, and they said yes. My mistake was believing I was getting the correct answer. I have since been told by employees of Vanguard that they have a phone "script" that was not properly followed, which is designed to prevent just this kind of mistake. When I say the money is inherited, (which they confirm I did) they're supposed to ask "from whom" - answering anyone but a spouse is supposed to alert staff to set up the special titling/separate account which I never got. It's been made abundantly clear by current accountant and attorney that any one of the "professionals" I was using should have spoken up and alerted everyone involved, and then it would have/could have happened correctly. Kind of like when horrible things go wrong in hospitals; it's never just one person, the real screw ups require that multiple different positions fail to do their job or speak out when the daisy chain begins. At the time, I thought I was being pretty sharp to realize it probably needed to be a trustee to trustee transfer, and to call Vanguard in advance to check it out. Not good enough! So yes, I am glad to have found this forum for future situations, and hope that I would know what to ask - or just ask about everything and drive you all to the brink! I'm frustrated with the need to become an expert in everything; finances have never been my favorite topic, and I wanted to believe I could rely on a company as large and reputable as Vanguard. The good news is I've just retired, so at least I have more time to learn. I've noticed that it is often recommended, even here, that someone "let Vanguard handle the transfer of your accounts, they know what to do." Most of them may know, but none of that matters if the wrong guy answers your phone call. I hope this serves as a cautionary tale for others. I really appreciate that so many here do know this kind of information and are so willing to share and help others with your knowledge.

Next, I'd like to get input about moving my funds and what to buy if I don't want to buy Vanguard; I'm guessing I should start another post for that.
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Re: Any fix for botched inherited non-spousal IRA?

Postby damjam » Fri Aug 31, 2012 2:21 am

keeptrying wrote:Next, I'd like to get input about moving my funds and what to buy if I don't want to buy Vanguard; I'm guessing I should start another post for that.

Yes, you should start a new thread for that. However to start you off you can read the wiki on the Three Fund Portfolio. Go to the section "Other than Vanguard, Boglehead-style."
Also when you start your new thread use the format suggested in the Asking Portfolio Questions thread. That will get you the most informed responses.

Best of Luck.
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Re: Any fix for botched inherited non-spousal IRA?

Postby House Blend » Fri Aug 31, 2012 11:12 am

keeptrying,

Here's an experience of mine where a rollover got screwed up, but Vanguard did unwind it in a satisfactory way. It was admittedly a much simpler situation than yours, and a lot less was at stake.

In 2010 I set up a Transfer Payout Annuity that would roll assets in an old TIAA-CREF 403b to my trad IRA at Vanguard in 10 annual payments.

First payment went through without a hitch: trustee to trustee, with T-C mailing a check directly to VG.

Second payment, in 2011, also seemed to go smoothly....until VG sent me my 2011 Form 5498 last May.

There was no report of a rollover on that form, unlike the 2010 version. So I called Vanguard to report the error. Very little friction from them; the specialist I spoke to mentioned that nothing on the check indicated what type of account the distribution was from, so apparently their default assumption is that it must be from another IRA (hence, not reportable on 5498). All they wanted to know from me was that I had indeed received a 1099-R from T-C indicating that this was a 403b distribution.

It took a few days to unwind the mistake, and it involved adding a lot of new entries into the transaction history of my account, but at the end of the day, I owned the same number of shares before and after I reported the error, and had a corrected Form 5498. Which should matter for taxes--without this correction, the IRS records would mark my rollover as a taxable distribution.

Possibly, this is T-C's screw-up, not VG.

Third payment will be arriving soon; I'll be watching it closely.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Alan S. » Fri Aug 31, 2012 5:10 pm

keep trying,

Has your attorney made a specific request to Vanguard (ie to recalculate the earnings on the 63k contribution and then transfer this amount into a propertly titled inherited IRA?). Did they request a response by a given date? In the first week of October if you don't get satisfaction from VG, you will have to make this dicey choice:
1) Treat as an excess contribution with earnings and have it distributed no later than 10/15. This will eliminate the 6% excise tax for 2011, but it will also make it virtually impossible for Vanguard to fix it and for the IRS to treat it as a non taxable transfer to an inherited IRA.
or
2) Leave the amount in the owned TIRA giving VG more time to correct this and avoid a taxable distribution, but if they don't correct it, you will owe the 6% tax plus income tax on the earnings and a 10% penalty on the earnings (because the earnings were earned in an owned IRA, and would not be a death benefit).

I don't understand why this is taking VG so long to resolve. The facts are pretty much known and unlike a series of transactions, this is only a single transaction that went haywire. Even though Calpers shares a large part of this problem, only VG can resolve it now. They also may have a recording of your conversations to consider.
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Re: Any fix for botched inherited non-spousal IRA?

Postby Mudpuppy » Sat Sep 01, 2012 2:18 am

Have you received copies of your current lawyer's correspondence with Vanguard? Given that the last lawyer dropped the ball on this topic, you should be watching the current lawyer closely to make sure you've selected one that can actually resolve this to your satisfaction. You also should be directing all of your correspondence with Vanguard through your lawyer's office. It's beyond the time when certified letters to the CEO or division heads would cut it. Let the lawyer handle the correspondence, but make sure you receive a copy of all correspondence so that you know the current lawyer is doing his job.
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Re: Any fix for botched inherited non-spousal IRA?

Postby tetractys » Sat Sep 01, 2012 10:40 am

If there is a solution, and there likely is, it's an initially simple one. Call the IRS and follow their steps. Untie the knot in the right order. -- Tet
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Re: Any fix for botched inherited non-spousal IRA?

Postby keeptrying » Tue Sep 04, 2012 11:28 pm

Thanks to everyone for the recent input. I am no longer sending letters to V myself, but thought that was worth a try and really expected that someone would respond, at least to try to to do some PR on the the issue, maybe help get me past the logjam with the legal department who were really hunkered down in defensive mode, but the silence has been deafening. So now, the only communication is between attorneys. I do feel comfortable that the current atty is tending to this (as his only issue) while trying to keep the cost down for me. The total consensus at this point, from a call to the IRS, consult with an online IRA specialist, review of Ed Slott's articles, my acct and current tax-specialist attorney, and Vanguard, is that there is no fix for this error. My atty still believes that if Vanguard had acted promptly they could have involved CalPers to return, then re-issue the payment, and get it deposited correctly; but they let too much time go by from my "discovery" of the problem for that to be credible. For regular IRA's, there are lots of "grace" provisions for correcting the most common mistakes. But for inherited non-spousal IRA's, there is no provision at all for correcting mistakes. I suspect some custodians may have done some, and if no one audits, it works just fine. Vanguard, from day one, has said there is no corrective step, the mistake was theirs, so they need to "make me whole." Yet it is now months later and they haven't done so. They insisted I have my acct do projections of the damages, then became rude when I told them what the acct's figures were. So now it's all fighting over numbers, but it's clear to me that any $$ settlement in the range they are talking about will not be as good for me as just getting the title corrected would have been. I think they are also spooked because there's lots of talk about the IRS coming down hard this year on IRA issues; IRS apparently going to start intensive review of these because of all the sloppiness that has surrounded IRA's, which led them to have to develop all the exception/grace provisions referred to above. We are focused on Oct 15 tax extension date as final for removal of amount plus earnings; my acct and atty both agree I could go ahead and do that at any time now, I have left it in up till now because I didn't want Vanguard to be able to say I ruined their opportunity for a fix. The hardest adjustment for me has been to accept that there truly is no fix for this, but I am coming to believe it. Really unfair, but there it is; so I'm trying to get over it and move on, which would be a lot easier if not compounded by Vanguard's failure to "walk their talk" I'm expecting them to insist I sign a confidentiality agreement with any settlement, so at least I am getting some satisfaction from talking now!
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Re: Any fix for botched inherited non-spousal IRA?

Postby Alan S. » Wed Sep 05, 2012 12:50 am

Yes, it's true the IRS is looking into reducing IRA related infractions of all types, but this effort is not directed at resolving specific one shot problems at the custodian end. A custodian as large as VG should have an idea of what corrective actions they can take without the IRS looking over their shoulder. While the IRS will never let the public know what flexibility custodians have to correct obvious errors, VG should know and I think they have more than what they are showing here. The only logical fix to this would be to calculate the earnings experience from the day the rollover was made, and set up an inherited IRA to receive a non reportable transfer from the current account. The only form VG would have to revise is their 5498 for the 2011 year end value of the IRA that received the rollover and to issue one for the inherited IRA. Very simple and minimal expense for VG. But if they were willing to do this, and knowing you have legal representation it appears now that they don't plan to do anything of a corrective nature. Perhaps they plan on doing something nice like paying your legal fees.........

I guess the only tning you can do now is not to miss the 10/15 deadline to request the corrective distribution and get your 2011 return filed reporting the taxable lump sum distribution. Since this will also take some time, you should order the distribution not much later than 10/1 if you don't hear further.

Now here's a non helpful presumption, but if you knew the outcome of all this effort would be nothing more than legal fees, you probably would not have said a thing and no one else would have either.
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