June 16, 2019

Retirement Account Documents – Read the Fine Print

  1. first, there was a section where Mr. Daley had to accept or decline the option to enable his account for margin transactions.  In a margin transaction, an investor borrows money from the brokerage house to buy stocks.  Mr. Daley did not decline the margin option.
  2. the second provision contained a guarantee provision.   This provision gave Merrill Lynch a security interest in Mr. Daley’s account if Mr. Daley ever came to owe money to the brokerage house.

At no point did Mr. Daley purchase stocks on margin or ever borrow money from Merrill Lynch and the trustee did not argue that there was such an intention.  Again, however, he did not explicitly decline the margin option.

Under tax law, however, the possibility that Mr. Daley could at some point in the future request margin privileges and that he might default, allowing Merrill Lynch could seize IRA money was enough to void the protected status of the IRA.

Because Merrill Lynch had a contingent lien against the proceeds of the account, Judge Stair concluded that the exempt status of the retirement account was forfeited and, and thus, that Mr. Daley could not declare his retirement account as exempt.  As Judge Stair noted “the mere opening of the Merrill Lynch IRA account caused the debtor to participate in a prohibited transaction….”

Judge Stair observes in his decision that the laws that allow retirement accounts to qualify as tax deferred are very strict and provide for no ambiguity.  In Mr. Daley’s case, the ambiguity yielded a very harsh result.

The practical lesson you can learn from this case is this: if you own a retirement account that contains more than a few thousand dollars, it may be wise to spend a few hundred dollars to have a retirement account specialist review the account and offer an opinion as to its status as a protected account.

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