Will YOUR Advisor Pass this IRA Test?
- David H. Kinder, RFC®, ChFC®, CLU®
- Nov 11, 2019
- 3 min read
Updated: Jan 18, 2023
I have a lot of agents and advisors that read my blog, so I'm sure this will get some interesting thoughts and comments on social media.
What IS the "IRA Test"? The IRA test is to ask "What does IRA stand for?"
If you Google it, the most common belief is that it stands for "Individual Retirement Account". And that's wrong.
That's not what IRA stands for.
What DOES it stand for? Individual Retirement Arrangement. And that is the legal title and term for all IRAs. And no, I didn't make this up. The Internal Revenue Service actually has this CORRECT! If you look up IRS Publication 590-A and 590-B, you'll see that they are specifically titled "Individual Retirement Arrangements". https://www.irs.gov/pub/irs-pdf/p590a.pdf
What's the difference between an Account and an Arrangement? Let's put it this way: an account at a bank belongs to you (and your joint-owner) as titled at the bank. An arrangement would imply a 3rd party or some other outsider to your "account" who is also in control and can dictate terms.
If your advisor believes that it stands for Individual Retirement Account, I believe you'd have an advisor that just wants to manage your money, regardless of where it is, and regardless of how it is taxed upon distribution.
As I've written before, terminology is critical in understanding various accounts and especially in understanding contracts.
The term 'account' implies that you have SOLE ownership and control. The term 'arrangement' would seem to imply that someone else has a say.
Isn't an 'Arrangement' a contract or agreement with others besides yourself?
On dictionary.com, the definition of Arrangement shows the following:
noun
an act of arranging; state of being arranged.
the manner or way in which things are arranged: a tactful arrangement of the seating at dinner.
a final settlement; adjustment by agreement: The arrangement with the rebels lasted only two weeks.
Usually arrangements. preparatory measures; plans; preparations: They made arrangements for an early departure.
something arranged in a particular way: a floral arrangement; the arrangement of chairs for the seminar.
Who 'Arranged' this Arrangement? It's between you and the United States Congress and the Internal Revenue Service.
Who sets the rules for this Arrangement? The United States Congress and the Internal Revenue Service. (See the IRS Publication 590-a and 590-b documents above. One is 61 pages, and the other is 63 pages.)
And because this arrangement is a partnership, who determines how much of your arrangement belongs to them? Again, that's the United States Congress and the Internal Revenue Service.
If it's a partnership, who would you say is the 'majority' partner and who is the 'minority' or 'silent' partner? Well, that might be a slight exaggeration, but we DO get voting rights - typically every November on a nationwide basis.
And yet, these facts aren't always apparent. Why? For the simple transposition of the word "Account" instead of the true and legal title of "Arrangement".
Do your own search! Type in "Individual Retirement Arrangement" in your favorite search engine and click on "Images" and see what you get. (Make sure you use "quotes" to get exact results.) You'll see FAR more images with 'Account' instead of 'Arrangement'.
Yes, there will be some results with the proper terminology, but not nearly enough. What should that tell you?
That most advisors, banks, Wall Street, and other financial institutions are FAR more interested in simply managing your money than in helping you to understand the true nature of your retirement partnership with the IRS.
A bit of history: In 1975, when they first started, they were called "Individual Retirement Savings Plans", per this link and image:
And sometime before 1985, the name was changed to "Individual Retirement Arrangements". See page 50 of this link and find Publication 590: https://www.irs.gov/pub/irs-prior/i1040--1985.pdf?fbclid=IwAR0tsImqoglN353DxIitG6g6ysWAsLPxa-1R52yJg_G4JMpEkDnUA0F4DDA
Now, for "extra credit": Apply that subtle omission to the Four Rules of Financial Institutions. Doesn't this slight omission help these institutions with their agenda?
