Revoked Individual Retirement Account (IRA)

What Is a Revoked Individual Retirement Account (IRA)?

The term revoked individual retirement account (IRA) refers to a retirement savings account that is canceled by the account holder within seven days of it being established. This seven-day period is referred to as the revocation period, which is generally noted in all IRA contracts. Once canceled, the financial institution must return the full contributed amount to the individual. As such, the institution cannot impose any fees or losses on the account. There are a number of reasons why people may choose to cancel their IRA, including uncertainty about their investment.

Understanding a Revoked IRA

IRAs allow individuals with earned income to save money for their retirement. A traditional IRA sets aside pretax money that is taxed as ordinary income when it is withdrawn during retirement. This option allows taxpayers to claim the contribution as a tax deduction on their annual tax returns. Roth IRAs don't provide any immediate tax benefit. But withdrawals are tax-free when they're taken during retirement. These accounts can be opened at financial institutions, banks, and brokerages.

The financial institution that holds your IRA must provide you with a disclosure statement no later than the date on which you open the account. This document explains the terms and conditions of the account, the responsibilities of the custodian, as well as your rights. One of these rights is the ability to cancel or revoke your account.

According to the Internal Revenue Service (IRS), your custodian must include information about how to cancel your account at the beginning of the disclosure. It must also provide you with the contact details (the name, address, and phone number) of the individual to whom you must send your revocation form. The firm must report the amount contributed and the amount returned to you on the appropriate form, usually Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans.

You have seven days from the day you open your account to cancel it. This time frame is called the revocation period. This means you're allowed to close your account without any financial repercussions before the end of that period. When an IRA is revoked, the financial institution cannot deduct any fees or investment losses. This is one reason why most investment firms won't let you invest in anything other than money market securities during the first week after you open an IRA account.

You don't have to give a reason for revoking your IRA. That means you can revoke your IRA account if you:

• Aren't confident with the particular
• investment options provided by the IRA custodian
• Changed your mind about opening up an IRA at the time
• Feel the commissions or fees are much too high
  

Special Considerations

The primary costs associated with IRAs are trade fees and commissions. IRA custodians (the brokerage, bank, or investment company where accounts are held) also have:

• Account maintenance fees
• Transaction fees or commissions
• Low balance fees
• Account transfer or termination fees

Some charge substantially higher commissions to buy mutual funds that are outside of a certain group of the most frequently traded funds. In other cases, they may charge nothing at all to buy or sell a select group of funds, often those that are managed by the firm.

If you're not happy with the fees that your custodian or traditional IRA trustee provides and want more bang for your buck, you may want to consider canceling your account and opting for a robo-advisor. A robo-advisor is a digital platform that provides automated, algorithm-driven financial planning services with little or no human supervision. It collects information from clients about their financial situation and future goals through an online survey and uses that data to advise or automatically invest assets.

IRA Basics

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

Plans have annual contribution limits that are established by the government. These contribution limits are adjusted annually for inflation. For the 2022 tax year, the maximum allowable annual contribution is $6,000, increasing to $6,500 for 2023. Taxpayers who are 50 or older are allowed to make an additional $1,000 in a catch-up contribution to their accounts. These limits don't apply to IRA rollovers or conversions and there is no age limit for making contributions after the 2020 tax year.