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.
- A revoked IRA is a retirement savings account that is canceled by the investor within the seven days that it is opened.
- Financial institutions must return the full amount contributed to the account holder and cannot deduct any fees.
- When you open your account, your custodian must provide you with a disclosure that outlines details on how to revoke your IRA and who you should inform.
- You don't need a reason to revoke or cancel your iRA.
- The amount contributed and returned because of a revocation is reported by the custodian on Form 1099-R.
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 A traditional IRA sets aside pretax money that is taxed as ordinary income when it is withdrawn during retirement.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.
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 1099-R. This will complicate your tax filing and force you to spend time trying to get the form corrected by the brokerage.
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
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.
Your IRA custodian may also close your account if you don't fulfill the requirements of the Customer Identification Program. This is part of the minimum reporting standards that financial institutions must follow for anti-money laundering programs.
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.
How Do You Revoke an IRA?
Your IRA custodian must provide you with information about how to cancel your account when you first open it. You can revoke or cancel the account within the first seven days of opening it and must inform your custodian of your intention to close it in writing. Keep in mind that you don't have to provide a reason for doing so. Your custodian must return the entire amount contributed and cannot deduct any fees or charges from the balance.
How Long Do You Have to Revoke an IRA?
You have seven days from the time you open your IRA to close it. You must inform the financial institution of your intention to close the account. The disclosure provided to you at the time you opened your account has the name and contact details of the individual who needs to be informed of your desire to cancel your IRA. You do not, however, need to provide a reason to revoke your IRA.
Can You Dissolve an IRA?
You can dissolve an IRA at any time and for any reason. But doing so does come with certain financial repercussions. If you do so, you may be subject to fines and penalties. This may include early withdrawal penalties (if you dissolve it before you retire) and an early close-out fee.