Brokerage Accounts Have Limited Protection
Q: I am nearing retirement and am concerned with the safety of my investments, which include several hundred thousand dollars in Keogh and individual retirement accounts invested with a stock brokerage house. Are my investments protected by a government agency? I understand that the accounts of the brokerage are insured privately, but does this insurance offer real security?-- C.S.S.
A: What do you mean by “protected”? Investments made with a brokerage are never “guaranteed” by any agency. Theoretically speaking, you could lose your entire portfolio through poor investment strategies and have no recourse for recovery. This is simply the risk you take for investing your money in the stock market and certain other securities offered through brokerages.
That said, let’s look at what type of protection you do have. And you do have some. First of all, if your brokerage goes out of business, you are likely covered by the Securities Investor Protection Corp., which insures each trading account held in the brokerage’s street name for up to $500,000. Most brokerage houses belong to this corporation. Many brokerage houses--particularly the larger ones--carry additional insurance on their own.
But this type of insurance only applies when a brokerage fails. It does not cover poor investment decisions or typical fluctuations in the market.
Even in the event of failure, SIPC only insures a portfolio up to $500,000, including a maximum of $100,000 in cash. And customers only get back an amount or portfolio equal to what they owned when the brokerage failed, not necessarily what they originally invested.
Finally, compensation from SIPC takes time and depends a great deal on the quality of records maintained by the brokerage.
Most customers can expect compensation in one to three months.
An Ex-Wife Won’t Hurt Your Benefits
Q: I have been divorced from my first wife for 29 years. We were married for 13 years. She remarried immediately after the divorce to a man about 10 years younger than herself. I am about to retire. Since she and I are about the same age, will she be eligible to claim any of my Social Security benefits?-- B.T.H.
A: So long as your ex-wife remains married, she is not entitled to claim Social Security benefits as your ex-spouse. However, should she divorce her current husband, she would be entitled to benefits as your ex-wife because you were married at least 10 years, the minimum time a marriage must last for a person to claim benefits as an ex-spouse.
However, even if your ex-wife should become eligible to claim on your account, this would in no way diminish any benefits your current wife--if you have one--would be entitled to receive.
Get IRS Ruling Before Rolling Over an IRA
Q: In a recent column you said if the beneficiary of an individual retirement account is a living trust, the trust must take a distribution and pay taxes on it. I am getting conflicting advice from my accountant and attorney who say I can make such a roll-over. Please clarify this for me.-- G.H.T.
A: Although federal regulations permit only a spouse to roll over an inherited IRA into another tax-deferred account, in several Internal Revenue Service private letter rulings, which aren’t official but give the agency’s general point of view, certain types of IRA roll-overs from a living trust beneficiary have been permitted.
In one case, private letter ruling No. 9016067, the IRS allowed a trustee to allocate the entire IRA funds to the surviving spouse’s revocable trust, which had already been established by the living trust. Then the survivor was allowed to withdraw the proceeds under his power of withdrawal and put them into another tax-deferred account within 60 days of the initial distribution to the living trust.
Until the IRS announces a change in its stated policy, someone who receives a distribution through a living trust and wants to roll it over into a tax-deferred IRA would be well served to consider getting a private letter ruling. An attorney or tax accountant should be able to provide assistance.
