What Is a Revoked Individual Retirement Account (IRA)?

A revoked IRA is a retirement savings account that has been canceled by the account holder seven days or less after it was established.

When an IRA holder elects to revoke the account, the full amount contributed to the IRA must be returned to the holder by law.

Understanding a Revoked IRA

When an IRA is revoked, no fees or investment losses can be deducted from it by the financial institution. This is one reason why most investment firms won't let you invest in anything other than a money market during the first week after you open an IRA account.

An IRA is a long-term retirement savings plan that individuals can establish to plan for retirement. Generally, an IRA plan allows you to defer taxes on the income you contribute until you retire and withdraw the money.

IRA plans have annual contribution limits that are established by the government and rise gradually with inflation. Individuals age 50 and older can make slightly higher "catch-up" contributions.

For the 2021 and 2020 tax years, the maximum allowable annual contribution is $6,000, plus an additional $1,000 in a "catch-up" contribution for those aged 50 and above.

Reasons for Revoking

You don't have to give a reason for revoking your IRA. Revocations may be made because the account holder realized the fees and commissions were too high, or the investments were unsuitable.

Most people who open IRAs are do-it-yourself investors, so the primary costs they face are trade fees and commissions. But robo-advisors are gaining popularity. Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little or no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice or automatically invest client assets. These firms typically charge fees of 0.25% to 0.50% of the assets annually, but fees can be higher.

IRA firms also have account maintenance fees, transaction fees or commissions, low balance fees, and account transfer or termination fees. Some charge substantially more in commissions to buy mutual funds that are outside of a certain group of the most frequently traded funds. Or they may charge nothing at all to buy or sell a select group of funds, often those that are managed by the brokerage.

It's wise to avoid revoking an IRA on or around key dates like the first day of a calendar year or the day federal tax returns are filed. If you do, you may get an erroneous form 1099-R. This will complicate your tax filing and force you to spend time trying to get the form corrected by the brokerage.