BANKING WITH PRINCIPLE; RETIREE IN DISPUTE WITH BANK OVER IRA CLERICAL ERROR.

Byline: Ben Sullivan Daily News Staff Writer

Rose McNally has a $5,300 gripe with her bank.

The retired real estate agent has been doing business with Glendale-based Fidelity Federal Bank and its predecessor for more than 30 years. Her living trust is in a Fidelity safe deposit box, as are keepsakes of her late son Steve, killed at age 20 by a drunk driver.

When McNally and her husband decided in the 1970s to open individual retirement accounts, there was no question where they would put their IRAs.

But, as McNally and Fidelity discovered late last year, when the bank opened her IRA, it bungled McNally's age. Instead of July 28, 1922, her birth was entered in Fidelity records as July 27, 1932.

As a result, when the Sherman Oaks senior turned 70-1/2, an important date in the life of an IRA holder, Fidelity kept mum. Customarily the bank would have sent a courtesy notice reminding McNally she should start drawing down cash or the Internal Revenue Service would do it for her.

According to federal law, if an IRA holder who has reached 70-1/2 does not withdraw a minimum amount from the account each year, the IRS can claim half of whatever should have been taken. In McNally's case, the IRS is now due a total of $5,265.74 for the years 1993-1996.

That much is agreed upon. But who should pay the fine and be liable for any future penalties has been in dispute for seven months, and what has emerged is a test of wills between one of the Valley's few remaining community banks and a woman who describes herself as a stubborn and wronged ``old bird.'' Along the way, the dispute has highlighted the sometimes murky field of liability law when things go wrong at a bank.

``A lot of people wouldn't even think of fighting a bank and their lawyers,'' McNally said. ``Well, why not if it's completely their mistake?''

In a life spanning eight decades, McNally said, she's cracked tougher nuts than Fidelity Federal. Born in Independence, Mo., before the Depression, she moved 20 times in 12 years as her family chased dwindling work as tenant farmers. Along the way, her father lost one eye and then the other in separate industrial accidents, forcing McNally and her five brothers and sisters to support themselves. As a parent in the 1960s, McNally suffered the death of her son - what she calls the worst experience of her life - when a drunk driver's car hit him while he was on the way to an evening summer school class.

For McNally, to give in to Fidelity now would be like refuting all that's come before.

To Fidelity the case is a simple matter of mutual culpability. The bank acknowledges it made the initial error, but said McNally, now 76, should have noticed the mistake on subsequent documents she signed.

``We don't feel the responsibility rests solely on our shoulders,'' said Fidelity spokesman Neil Osborne.

Tax authorities are similarly split.

``Why should she be out of pocket for something the bank messed up on?'' asked Louis Michelson, a tax attorney and certified public accountant at Grobstein Horwarth & Company LLP in Sherman Oaks. Though the IRS might waive the penalty and interest fees if McNally explains the situation to them, there is no guarantee of clemency, Michelson said. ``It seems to me she's got a headache she did not create.''

IRS officials declined to comment on the case. ``The IRS will neither take sides nor get into the middle of that dispute,'' spokesman Keith Kimball said.

After months of writing and telephoning back and forth after the error was identified in December, Fidelity offered this spring to split any IRS penalties that emerge. McNally declined.

``I'm a fighter,'' she said. ``What they have put me through is wrong. They made all the mistakes, and they want me to buckle under and let them off the hook. No way.''

In June, she thought she had won when Fidelity offered to write her a check for the full $5,265.74. But bank officials said that, in return, she would have to sign a waiver releasing Fidelity from all future liability and prohibiting her from discussing the settlement with anyone.

``We're sorry this matter has caused her frustration, but if she is willing to sign the release, the matter is ended,'' Osborne said.

Eugene Younger, technical manager for Triple Check Income Tax Service in Montrose, said Fidelity's offer is probably the best McNally should expect. ``If I were put in this position, I'd probably take it,'' Younger said. ``There's some question in my mind as to bank's liability,'' he said, because banks are not required to keep track of clients' IRA accounts and time lines.

But Michelson said that by accepting the money without an admission of guilt from the bank, McNally would be left liable for any unanticipated penalties. Adding insult to injury, he said, McNally would also have to pay tax on the Fidelity payment itself.

``The danger when you receive something like this . . . is that it's like she just won lottery money or something, and very likely would be taxed,'' Michelson said.

Talks have since stalled between McNally and Fidelity Federal. McNally has told bank officials she won't sign the release and wants them to write her a check - no strings attached. Fidelity won't. In the meantime, McNally has sent her case to the IRS and awaits the tax agency's ruling, but interest and penalties on the debt are mounting.

With no clear winner and both sides frustrated by the process, financial advisers say the case points to the need for bank customers to stop thinking of the institutions as financial guardians and to start looking out for themselves. With the rising popularity of 401(k) savings accounts and other tax-deferred plans, they say, it is strictly buyer beware.

``You should never rely on the bank, no matter what,'' said Triple Check's Younger.

WHAT TO DO

Consumer officials say the key to avoiding costly mistakes on individual retirement accounts and other tax-deferred investments is good communication with your financial institution.

When opening an account, they recommend:

Ask at the bank when minimum balances - if any - must be made.

Find out if your bank will send a courtesy note reminding you when withdrawals must be made to avoid tax penalties. But even if the answer is yes, do not rely on it.

Check and double-check whether the bank got all the dates right, especially your birth date, for the account.

Be sure you and the bank agree on the interest rate at which your money will grow or on the degree of risk involved if it is a mutual fund or bonds-based account.

If tax problems arise or you have question you can't resolve with the financial institution, the Internal Revenue Service is a surprisingly helpful source of information. IRS representatives can be reached to help you at [phone]. For copies of IRS regulations and other advice, visit the organization's Web site at www.irs.gov.

CAPTION(S):

Photo, Box

PHOTO (Color) Rose McNally refuses to sign a release to get $5,265.74 from her bank in Glendale for an error that she says might cost her even more.

David Sprague/Daily News

BOX: WHAT TO DO (see text)