Folio and IRAs

[core]

I have not received (nor has anyone that I know of) any statement or explaination from LC stating that my past trades on folio have been in violation of SEC and IRS laws and regulations.

No, you were just given a statement that you can't do it.  But you did it anyway, even after having seen the message.  They could come back and say you could or should have known that continued trading might worsen your circumstances.

Wouldn't the IRS or SEC take direct action in notifying affected account holders that illegal transactions have been made without their knowledge?

Nothing "illegal" has taken place.  And investigations are rarely public.  The government works slowly.  The message only appeared in what, September?  That could be when Lending Club's lawyers discovered there might be a serious problem.  Maybe some regulator told them but maybe they discovered it on their own.  We don't even know that anyone in D.C. knows anything about this. 

Maybe it's time to start talking to our representatives in congress just to get some answers.  There are a lot of freshman reps in the House right now who are likely dying for something to do.

[GS]

Core,

If any of this is true, then I was already screwed for 2013 anyway ... I don't think the few trades I made after October make much of a difference.    But, as we already pointed out, how does posting a drastic policy change statement in "obscure corners" then not enforcing it, despite the fact that it could be easily enforced, qualify as notice?  Until November, at least, the Folio FAQs still said any LC member could participate, and I was unaware that had been changed until I checked today.   Apparently, if you call or email a question, you get no meaningful response.  I bet most users who use Folio and don't read Lend Academy have no idea this is even going on. 

My guess, if there is a tax related problem, is that LC and regulators are working out a solution, users will be held harmless, and it will be resolved without the IRS raiding my house.

[Rob L]

Well, if my taxes for 2013 were screwed up, then what difference does it make if I traded until Dec 31st?  I haven't traded yet in 2014 and I haven't decided if I'm going to or not. 

The difference to me is the amount of money involved and worst case tax consequence. More money, larger consequences.

I'm hoping for the best and planning for the worst. My worst case isn't much of a problem. I'm very lucky in that regard. I opened my IRA account in 2013. Folio transactions were $17.05 notes purchased, $735.09 notes sold and $7.35 fees. So, given my Folio account may not be an IRA then I POSSIBLY "distributed" $752.14 from and "contributed" the same amount to my IRA. If I receive no IRS forms regarding these transactions and unless further clarification is provided I plan to include this in my 2013 tax filing as a precautionary measure. The "distribution" will essentially be added to my normal income, and the "contribution" will reduce the amount of cash I contribute to my IRA. I'm past 59 1/2 so I don't have to worry about the 10% penalty.

This may be somewhat like a person who receives payments from a company, but the company neglects to send a 1099. The person should include the income in their tax filing regardless (check the little box saying no 1099 received). The company will be in trouble if audited. This is a worst case way to view it, but who knows...

I'm still employed and don't want any distributions from my IRA at my current marginal tax rate. I certainly don't want the hassle of dealing with this in 2104 and tax years to come.

My problem is the loss of liquidity of my investment (in financial terms liquidity has value) when LC added this restriction after I invested my funds. I'm stuck with no out for 3 years or until they fix it (if it's fixable). To me it's just flat scary that LC could do this with impunity. Maybe that's why I'm so paranoid.

[GS]

I'm pretty sure I'm safe, too, since my IRA is a Roth and I neither would have "withdrew" more than I put in, nor deposited more than I'm allowed.  There is no tax or penalty for withdrawing up to your deposited amount on a Roth, since I've already paid the taxes.  That said, I continue to doubt anything will come of this, as far as the users are concerned, anyway.

[core]

So, given my Folio account may not be an IRA then I POSSIBLY "distributed" $752.14 from and "contributed" the same amount to my IRA. If I receive no IRS forms regarding these transactions and unless further clarification is provided I plan to include this in my 2013 tax filing as a precautionary measure.

There's no way in hell I'd do that.  Since you're over the minimum age, I agree that there's really nothing seriously wrong with putting down that $752.14 distribution but it's completely silly and asking for trouble IMHO.  However if you put down the contribution where none really took place then that is a fraudulent return.  Just wait for the forms and put down what they say.  The last thing you want to do is have numbers that don't match what is being reported.  Lending Club is clearly aware of this issue so come February when the forms come out they will have made a decision as to how far they're going to carry this cover-up.  We may even have some answers by then.

I certainly don't want the hassle of dealing with this in 2104 and tax years to come.

Somehow I don't think you'll have to worry about that.

I'm stuck with no out for 3 years or until they fix it (if it's fixable). To me it's just flat scary that LC could do this with impunity.

Agreed, and it pisses me off.  Changing the rules in the middle of the game. 

As I see it, it's similar to any of these situations:

- Buying a $100 Target gift card and them later adding a restriction saying you can only use it to buy something useless like My Pretty Ponies or only on Saturdays. (equiv: restrictions on selling in-progress notes)
- Buying a $100 gift card at a modest discount and have them "adjust" the value to $75 a month later (equiv: no negative YTM sales)
- $100 gift card redeemable only for $1 per month (this BS)

I wouldn't use the word "impunity" though.  As far as I know nobody has sued them for such things.  Maybe that needs to change.

[Rob L]

However if you put down the contribution where none really took place then that is a fraudulent return.  Just wait for the forms and put down what they say.  The last thing you want to do is have numbers that don't match what is being reported.

I didn't make myself clear. I plan to reduce my contribution amount my $752.14, but I would not claim it was contributed. How would I know?
I'm permitted to contribute up to $6,500 but will be sure to contribute $5,747.86 or less in case this nonsense is viewed as a contribution. Wouldn't want to inadvertently exceed the max.

Lending Club is clearly aware of this issue so come February when the forms come out they will have made a decision as to how far they're going to carry this cover-up.  We may even have some answers by then.

Gee, I hope so but I'm not exactly sure LC has any fiduciary responsibility to me in this matter.
This is what I think I'll do in the absence of additional information.

Somehow I don't think you'll have to worry about that.

You can count on it.

[Rob L]

I'm still of the theory that this is just a fee dispute between LC/Folio until further notice.

I recently learned by another thread here that Prosper also does not permit IRA accounts to trade on Folio.
I'm pretty sure I'd read confident statements here on this forum to the contrary, but I don't know if Prosper also changed the rules mid-game.
 If it's a fee dispute then it involves both LC and Prosper.

[core]

If it's a fee dispute then it involves both LC and Prosper.

And a fee dispute that only affects IRAs.  If Folio wanted more money they could ask for the whole hog.  I can't believe that Lending Club would put out a message FORBIDDING trading 4+ months ahead of time "just in case the current contract expires without a deal being reached".

Besides, as far as Folio is concered, IRAs are _less_ work, not more.  No 1099's.  No tracking cost basis.  No nothing.  Especially since they do not handle the contributions and distributions.  There is nothing to track!  Nothing is stored there.  Taxable accounts are way more headaches.

And finally, Lending Club is the one that generates all the reports, even for Folio stuff.  Take a look at your two 1099's for last year.  The LC and Folio ones were generated by the same software; they are exactly the same down to the pixel except for the company name.  Folio doesn't have to do anything except collect big fat fees.  More like royalties.  They don't touch a damn thing so let's stop all this talk about how they have to do more "work" for IRAs.  There isn't any freaking work, and even if there was, Lending Club would be the one to do it, not Folio.

[GS]

I'm still of the theory that this is just a fee dispute between LC/Folio until further notice.

I recently learned by another thread here that Prosper also does not permit IRA accounts to trade on Folio.
I'm pretty sure I'd read confident statements here on this forum to the contrary, but I don't know if Prosper also changed the rules mid-game.
 If it's a fee dispute then it involves both LC and Prosper.

I don't use Prosper, but a Prosper user says on Page 7 of this thread that they do allow IRA trading on Folio, starting last year.

[Rob L]

Yeah, me too. I do not use Prosper and saw what you did in this thread.
More recently however, "All I know is what I read in the papers":
http://www.lendacademy.com/forum/index.php?topic=1902.0

[GS]

Interesting and informative link, there.  Thanks for posting that.  I don't read the Prosper boards, so I was unaware of that thread, but at least Prosper seems to be communicating with their users what exactly the problem is, and it's that they are seeking clarification if Folio is a "valid IRA trustee by the IRS".  First time I've heard anyone claim a P2P company made that statement, so that does give some validity to the theory.  But if it's true, then at least we know their is a conversation between Folio and the regulators to clear up this matter.

[Rob L]

They don't touch a damn thing so let's stop all this talk about how they have to do more "work" for IRAs.  There isn't any freaking work, and even if there was, Lending Club would be the one to do it, not Folio.

Just for the record Senator, I do not, nor have I ever, thought this has anything to do with a fee dispute.
Don't think I ever said more work was involved. Doesn't matter.
Did say Folio might charge more for IRA accounts and/or transactions if/when this mess is resolved. If they can they probably will and I'm over a barrel liquidity-wise.
Wait 3-5 years or pay an extra X bp transaction fee or some annual fee for an IRA compliant Folio account? Maybe I'll have a choice some day.
Again the paranoia...

[core]

Don't think I ever said more work was involved.

Naw, I didn't mean to imply that you did.  When I go off on one of my usual multi-paragraph rants it doesn't always have to apply to the original quoted material.

It has just been a common theme:

It could be that Folio wants to cut off IRA accounts because of the additional accounting and paper work burden.

This rings true to me, GS

On the other hand, maybe you did...

More book keeping work will be required of Folio as well as annual distribution of the required IRS forms to investors. Doubtful this will be free; Folio fees may rise for LC IRA investors.

But you're right, it does not matter.  All that matters is the ability for us to trade notes when we want to since that was the agreement when we bought the things. 

And the fact that there's a cover-up going on (regardless of what started all this), perpetrated by a company that is holding on to a lot of our money.  DanB of all people said it best:

Lending Club is a financial services company. They are not a bank that is guaranteed by the government. The ONLY thing LC has going for themselves is "trust".........that is all. Nothing else is worth crap if trust becomes an issue.

[GS]

If it's a fee dispute then it involves both LC and Prosper.

....


Besides, as far as Folio is concered, IRAs are _less_ work, not more.  No 1099's.  No tracking cost basis.  No nothing.  Especially since they do not handle the contributions and distributions.  There is nothing to track!  Nothing is stored there.  Taxable accounts are way more headaches.

....

For the most part, couldn't the same be said for other IRA examples, like stocks for example?  You have to track cost basis and dividend distributions in a taxable stock account, but in an IRA account, you only have to track cash in and cash out.  Yet, most online stock brokers give away free taxable investment accounts, but charge a yearly fee for IRAs.  LC gives away free taxable investment accounts, but charges a fee for IRAs, even though, as you said, Taxable accounts are more headaches.   If I had to guess why, it probably has nothing to do with amount of work, and more to do with the cost of bureaucracy of compliance and regulations at the Federal level.

[core]

Yet, most online stock brokers give away free taxable investment accounts, but charge a yearly fee for IRAs.

Yes this is certainly true.  If I had to guess at the 'why' though I'd say it had more to do with money than the bureaucracy/compliance because the whole industry is filled with compliance headaches and IRAs are not any more scrutinized nor do they require any additional reporting.  Actually less.  If you don't make any additional contributions or withdrawals then nothing needs to be reported at all as far as I know.

My wild guess as to the 'why' is:  Many people have IRAs containing stocks who never do any other active market investing.  They may sit on the same stable stocks and boring mutual funds their whole lives.  If you're not trading the broker isn't making money.   Taxable accounts are going to have more churn, I would think.  More money.  The fees make up for those passive people.  As for why a minimum commission wouldn't be adequate, well ya got me.  For some brokers it is.

The other answer may be:  "Because it's always been that way".  And because they can get away with it, because that's what everyone else is doing.