Brokerage forcibly closed my wife's retirement Roth IRA account without notice - tax implications?

My wife had an old Roth IRA rollover account with Bridgeway Financial that we basically treated as set-it-and-forget-it. Last month we received a random check in the mail from them with no supporting documentation whatsoever. At first I thought it was some kind of scam, but the amount seemed close to what her retirement account was worth. When I called them, they casually informed me they had closed her account due to "inactivity" because they hadn't heard from her in several years. They already took out what appears to be ordinary income taxes, but I'm realizing we're probably going to get hit hard with early withdrawal penalties too since my wife is only 43. Is this even legal for a brokerage to do?! I'm planning to call and speak with a manager tomorrow to express my extreme frustration, and I'll definitely be closing the other two accounts I have with them since I'm completely done with their business practices. Do I have any options to minimize the tax impact at this point? The check arrived about 10 weeks ago, so I'm worried I might be too late to do anything. This feels like an incredibly expensive lesson, and I will absolutely never do business with Bridgeway again after I close my remaining accounts. UPDATE: Thanks for all the helpful comments! Here's what I've learned that might help others: * I missed the 60-day window to roll the check into another Roth IRA. This was my biggest mistake as I didn't realize this was an option when I first received the check. * We have a 19-year-old dependent still in undergraduate studies. We pay her tuition at a state college. Normally I can't deduct this on regular taxes due to income limits. * I was able to reduce some of the penalty/taxes by classifying the withdrawal reason as paying for college tuition for my daughter. For this specific purpose, there's no income cap restriction, which was a lucky break. * We're making an additional IRA contribution for my wife to further offset the tax impact. Still incredibly frustrated about the whole situation, but trying to make the best of it. I'm grateful we can afford to make an extra IRA contribution, and I definitely learned something new through this experience.

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20 comments

Alfredo Lugo

•8M

This is definitely frustrating, but there are a few things you should know. Brokerages can indeed close inactive accounts, but they're supposed to provide adequate notice before doing so. The fact that you received no communication beforehand is concerning. Regarding tax implications: since this was a Roth IRA, you should only owe taxes and penalties on the earnings portion of the distribution, not the entire amount. Your wife's contributions to the Roth IRA can always be withdrawn tax-free. The 10% early withdrawal penalty would only apply to any earnings in the account. If you received the check within the last 60 days, you could have done an indirect rollover to another Roth IRA, but unfortunately, it sounds like you're past that window now. The education expense exception you found is definitely helpful - that waives the 10% penalty (but not ordinary income tax on earnings). Make sure to carefully report this on your tax return - you'll need to complete Form 8606 to calculate the taxable portion of the distribution. And when you close your other accounts, make sure to directly transfer them to another institution rather than receiving checks to avoid this situation again.

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Alfredo Lugo

•8M

Yes, you're absolutely right. With a Roth IRA, contributions go in after-tax, so they should never be taxed again when withdrawn. If the brokerage withheld taxes on the entire distribution amount (including the contribution portion), the OP can definitely reclaim that overwithholding when filing their tax return. The 5-year rule is a bit complicated with rollovers. If this was a rollover from another Roth IRA, the original Roth IRA's starting date would carry over. However, if it was a conversion from a Traditional IRA to a Roth, then each conversion amount has its own 5-year clock for penalty-free withdrawals. This is why proper documentation from the brokerage would have been essential.

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Kaitlyn Jenkins

•8M

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Kaitlyn Jenkins

•8M

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Caleb Bell

•8M

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Rhett Bowman

•8M

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Rhett Bowman

•8M

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Daniel White

•8M

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Nolan Carter

•8M

Something doesn't make sense here. If this was truly a Roth IRA, then your wife already paid taxes on the contributions. You should only owe taxes on any EARNINGS in the account, not the full amount. And even then, only if the account wasn't open for 5+ years or she's under 59.5. Did you check whether they actually withheld the right amount? If they withheld taxes on the entire distribution including the original contributions, you should get that back when you file your taxes. The 10% early withdrawal penalty would also only apply to earnings, not your original contributions.

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Gianna Scott

•8M

You're right - that's an important detail I should have mentioned. The account was a mix of contributions and some significant growth over the years (it had been sitting there for about 11 years). The taxes they withheld were apparently only on the earnings portion, which does make sense. The issue is the 10% early withdrawal penalty that we'll have to pay on those earnings since my wife is only 43. The education expense exception ended up being our saving grace since we can avoid that penalty by using the funds for our daughter's tuition. But we're still stuck paying regular income tax on all the growth, which we were hoping to avoid until retirement.

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Nolan Carter

•8M

That makes much more sense, thanks for clarifying. The education expense exception is definitely your best option here. Just make sure you document everything thoroughly for your tax return - you'll need to prove those education expenses match the amount you're claiming for the exception. You mentioned making an additional IRA contribution for your wife - that's a great strategy to offset some of the tax impact. If you're eligible, you could also consider maxing out an HSA contribution if you have a high-deductible health plan, as that's another way to reduce your taxable income for the year.

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Tasia Synder

•8M

Inactive account policies vary by institution, but most reputable brokerages will make multiple attempts to contact you before taking such drastic action. They typically send letters to your last known address, emails, and sometimes phone calls before considering an account abandoned. Generally, these accounts get reported to the state as unclaimed property rather than being liquidated and sent as a check, but policies differ. The best prevention is to log into all accounts at least once per year, keep contact info updated, and respond to any communication attempts.

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Amara Nwosu

•3M

This is exactly why it's so important to keep your contact information updated with all financial institutions, even on "set it and forget it" accounts. I'm sorry this happened to you - it's incredibly frustrating when a brokerage takes such drastic action without proper notice. One thing to add to the great advice already given: when you do close your remaining accounts with Bridgeway, make absolutely sure to request direct trustee-to-trustee transfers to your new institution rather than receiving checks. This avoids any possibility of triggering taxable events or missing rollover deadlines. Also, for future reference, it's worth setting calendar reminders to log into retirement accounts at least once a year, even if you're not making changes. This simple action usually resets any "inactivity" timers and ensures you receive important communications. Some people also set up small automatic contributions (even $25/month) to keep accounts clearly active. The silver lining is that you found a way to use the education expense exception - that's going to save you significant money on penalties. Make sure to keep detailed records of your daughter's qualified education expenses to support that exception if the IRS ever asks.

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