The custodian of an individual retirement account is a fiduciary, who must act for the exclusive benefit of the account owner and beneficiaries. Any misconduct by the IRA custodian can result in penalties to the custodian and possibly to the owner. Normally, if you are unhappy with a custodian, you look for a new brokerage. However, if you simply want to change the brokerage employee in charge of your account, you might have some options.
The Internal Revenue Service requires IRA custodians to be banks, insured credit unions, brokers, mutual funds and other approved financial institutions. The custodian can’t accept contributions in excess of the legal limit, and all contributions must be in cash. However, rollovers from other accounts can include non-cash assets. The custodian can’t do anything to force you to forfeit the assets in your account, and he must ensure that you don’t buy a life insurance policy or any collectibles, except for certain precious metals, in the IRA. Finally, the custodian must ensure you begin taking required minimum distributions from a traditional IRA after you reach age 70 1/2.
The fiduciary responsibilities of an IRA custodian make it a “disqualified person” for purposes of prohibited transactions. In practice, this means that the custodian can’t receive unreasonable compensation for managing an IRA and can’t sell property to it. It’s also prohibited for anyone to borrow from an IRA, use it as security for a loan or use it to buy personal property. A custodian must correct any conditions that involve excess contributions or undistributed required distributions.
Penalties for Being Bad
You can be charged a 10 percent penalty for an early withdrawal. However, if you commit a prohibited transaction, the IRA will lose its status, and the IRS will deem it distributed on January 1 of the year of the infraction. You’ll owe any taxes and penalties resulting from this deemed distribution. If your custodian performs a prohibited transaction or fails in its responsibilities, it faces penalties beginning at 15 percent of the uncorrected transaction, but the penalty can escalate to 100 percent. If you participate in a prohibited transaction in collusion with the custodian, the IRA will lose its status.
Custodians and Brokers
It would be very rare for a broker holding an IRA not to be the custodian of that IRA. If this should be the case, you might be able to transfer or roll over the IRA to another custodian but still keep it at the broker. If you have a problem with a brokerage employee, the most direct action would be to communicate with a high-level executive and have the IRA placed under another employee’s management. If you have reason to suspect the custodial employee is guilty of misconduct or fraud, you should contact the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority and bring the suspected infraction to their attention.
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