Self-Directed IRA Custodian Resignation Letter: So, What’s Next?
When going through your daily stack of mail, you come across a puzzling letter from your self-directed IRA custodian. The letter informs you that the custodian is “resigning” from your IRA account in 30 days. Immediately a flurry of questions comes to mind: What does this mean? Who should I call? What do I need to do?
It happens more frequently than you would think, and at PENSCO we’ve helped our fair share of clients through this process. If this letter lands in your mailbox, here’s what you need to know and — more importantly — what you need to do.
What causes an IRA custodian to resign?
Custodians choose to resign from IRAs for a few different reasons. Sometimes it’s due to stricter regulations from the SEC that make it more difficult for the average wire house or brokerage firm to custody alternative assets in retirement accounts. You may also receive a custodian resignation letter due to lack of action by an IRA account holder or by the investment issuer that would make the IRA out of compliance with the IRS regulations or the custodian’s policies. For example, if you neglect to pay custodial fees, or your asset sponsor doesn’t provide annual valuations.
What’s at stake?
Taking no action when you receive a resignation letter almost always results in unwelcome consequences. According to IRS regulations, every IRA must be must be held in a trust or a custodial account. Assets held within an IRA should be in the name of the Custodian, for your benefit, e.g. “Custodian Name FBO ‘Your name’ IRA.” If you take no action when you receive the resignation letter, the IRA could be closed and the assets are distributed to you personally — where they’re reregistered under your name and not the name of the custodian for benefit of your IRA. This type of resignation may result in a taxable distribution, and there could be additional penalties involved if you’re under the age of 59 ½.
How do you avoid a taxable distribution?
Take action! By following these steps you can prevent an involuntary distribution:
- Most resignation letters include a list of referrals of self-directed IRA custodians to call that may be able to take over as custodian of your assets. PENSCO Trust, for example, has a team of experienced professionals who are well versed in assisting clients through the resignation process from the account opening stage to accepting the assets in the new IRA. We welcome your call if you find yourself in this situation — you can reach us at 866-818-4472.
- Gather copies of your original asset’s documents, as your new IRA custodian will need these in order to perform an administrative review of the asset. Documentation needed is dependent on the asset and the custodian. For example, typical documents for private placements such as LLCs include copies of the original executed subscription agreement and/or operating agreement, governing documents such as articles and certificate of organization, and a certificate of good standing.
- Complete an IRA account application and IRA transfer form.
- Submit all documentation to your new IRA custodian well in advance of the resignation deadline.
What happens if you don’t meet the resignation deadline?
The asset may be distributed, which may result in taxable transaction. It will be considered a 1099 tax reportable event. However, even in this scenario you still have 60 days from receipt of the asset to rollover the same asset to a new custodian. As long as the assets are received in an IRA with the new custodian within 60 days, you’ll most likely not owe any taxes from this event (but make sure you understand the rules of a 60 day rollover before relying on this method).
So what should you do when you receive an IRA custodian resignation letter? Take action and start the process of identifying a new custodian!
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
Editor’s Note: This is an updated version of a post we originally published in July 2014. We welcome new comments and questions below.