IRA Error Demands Fast Action
Q: Several months ago I transferred my individual retirement account from a Puerto Rican bank in California to a well-known mutual fund. The transfer was completed within the 60-day limit imposed by the Internal Revenue Service. Still, the bank retained 10% of the funds as a penalty. The mutual fund representative says I have been treated wrongly. I concur. The bank refuses to cooperate. What can I do?-- P.A .
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A: If the facts are as you have recounted them, our experts say that you have indeed been treated improperly and should move q: uickly to redress the error to insure that you are not further penalized. How should you proceed?
First, you must try to determine why the bank withheld the funds. From your recounting, it would appear that the bank has erroneously imposed a 10% tax withholding on the transferred funds on the misinformed notion that your moving the account constituted an early withdrawal of IRA funds. This penalty was improperly assessed for two reasons: Taxpayers are entitled to transfer IRA accounts between institutions at least once a year, and any penalties for breaking account-transfer rules are assessed at the time a taxpayer files his or her tax return. The penalty is not supposed to be assessed at the time of transfer since, theoretically, the institution has no way of knowing if the money is being correctly or improperly transferred or even completely withdrawn.
According to Henry Ross of the Puerto Rican economic development administration, the bank with which you are dealing is subject to the tax laws of the United States because it is operating in a branch office in this country. Further, you are subject to U.S. tax laws as a resident and citizen of the United States. However, if you were dealing with a bank located in Puerto Rico and were a resident of that territory, neither you nor the bank would be subject to U.S. tax laws since they do not apply to residents of territories not entitled to vote in federal elections. Remember the Revolutionary battle cry “No taxation without representation”? It still applies.
Although the penalty has already been assessed, you should be able to recover the money--or at least get a credit for it--when you file your next federal tax return. Simply note on the return the payment of this tax and debit that amount from any taxes you owe for the year.
The most important thing you can do--and you must do it within 60 days of the transfer--is to make up the 10% deducted from your account before it was transferred to the mutual fund. You will have to do this with funds out of your pocket, but unless you do, you will be trapped in the absurd Catch-22 situation of being accused of prematurely withdrawing the 10% that was improperly withheld before the transfer was completed.
You may, of course, also complain to the highest possible levels of the bank’s organization. You might even seek the aid of the Federal Deposit Insurance Corp. consumer counselors ((800) 934-3342), who can give you some helpful advice. Virtually all foreign banks doing business in the United States are covered by FDIC insurance and are subject to FDIC regulations.
Inheritance Stays Separate Property
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Q: Does a spouse have any right to the other spouse’s inheritance or monetary gift? Is the spouse who receives the inheritance or gift free to do as he or she wishes with that money?-- G.H .
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A: Even in community property states such as California, inheritances and gifts are considered separate property within the marriage. In addition, income generated from the investment of an inheritance or gift is considered the separate property of the spouse to whom it was given. The exception to this occurs when the separate funds are commingled with community property accounts. This means that if you receive a gift or inheritance and you want to treat it as your own separate property, you must take care to deposit it in a separate account from any of the joint accounts you hold with your spouse.
Ex-Spouses Entitled to Social Security
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Q: A recent column discussed Social Security benefits for divorced spouses. I want to know what type of benefits an ex-wife is entitled to receive if her ex-husband has remarried. Would both the ex-wife and the current wife be entitled to benefits?-- P.D.Q .
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A: A divorced spouse is entitled to receive Social Security benefits accumulated by the ex-spouse if the couple had been married at least 10 years and the primary wage earner is already drawing benefits. If the wage earner is still working, the ex-spouse may draw benefits if the couple has been divorced at least two years and the wage earner is at least age 62. By the way, the Social Security Administration treats ex-husbands and ex-wives equally; each is entitled to collect on the other’s benefits under the same rules.
Benefits paid to an ex-spouse in no way reduce the amount available to the primary wage earner and his or her current family. A current spouse is entitled to draw spousal benefits even if a wage earner has one or more ex-spouses drawing benefits on that account. These are all considered separate payments and an ex-spouse in no way robs a current spouse, or another ex-spouse, of anything.
Your question is one of dozens this column routinely receives on Social Security benefits available to spouses, widows and divorced spouses. Because of that, we have prepared a pamphlet addressing some of those questions. To order a copy, send a check for $4.33 (including tax and postage) to Times on Demand Publications, P.O. Box 60395, Los Angeles, CA 90060. Make checks payable to the Los Angeles Times. Please allow six to eight weeks for delivery. (A similar pamphlet on 401(k) plans can be ordered from the same address for $5.41.)
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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest.
