Worthless Stock in an Roth IRA
In 2010, a client converted his IRA (about $150,000) into a Roth IRA. He purchased an IPO of regional bank stock with 100% of the account. In 2013, the bank filed for bankruptcy and now the $150,000 Roth IRA is worthless. Is there anything he can do? Is there any way for him to un-do the conversion that was done in 2010 at this point and get any tax relief? Are there any loopholes that would allow him to somehow use non-qualified fund to buy the worth stock out of the Roth. Since the stock is now deemed worthless, we are trying to figure out if there are any ways he can get any of the taxes he paid on the conversion back or any other strategies to take advantage of the situation. In addition, he also used non-qualified funds (about $250,000) to purchase the bank stock and has a huge amount of capital losses. Any help is appreciated.
Permalink Submitted by Alan - IRA critic on Mon, 2015-01-19 19:08
No way to recharacterize the conversion now. That deadline was 10/15/2011. If this is his ONLY Roth IRA, then he can close it and qualify for a misc itemized deduction to the extent of his 150,000 loss. The loss is reduced by 2% of his AGI and if he is subject to AMT this loss would not be allowed. If he has other Roth IRAs please advise the balance. As for the taxable account capital losses, they can be used to offset cap gains, but no more than 3,000 can be used to offset ordinary income with the rest carried forward to future years. Finally, you might check to see if there are any class actions suits against the bank that he could join.
Permalink Submitted by Todd Martin on Wed, 2015-02-11 21:21
Thank you Alan. The client does have a balance in another Roth IRA of $38,293.95 and IRA balances of $212,226.87. They do file a joint return and his spouse also has a Roth balance of $26,435.81 and IRA balances of $86,735.58. Based upon your previous instrucitons is this still something he can do based upon the $150,000 of now worthless stock?
Permalink Submitted by Alan - IRA critic on Wed, 2015-02-11 21:53
It would considerable analysis to determine whether the other Roth should be closed. His spouse’s IRAs and his own TIRA are not part of this, just his own Roth IRA. He needs to know the total amount contributed (but not withdrawn) from his Roth accounts and then determine how much that exceeds the remaining value. For example, if all his regular and conversion contributions totalled 100k and he received 38k from closing his Roth, his gross misc deduction would be 62k. Then they would figure a hypothetical tax return for 2015 to determine how much in taxes would be saved by doing this. There would be no due for distributing the Roth providing he has not done conversions in the last 5 years. The final decision is based on projecting the after tax income on 38k plus the tax savings for his life expectancy vrs the gross earnings amount is would get on a 38 Roth since that would be tax free. I suspect the tax savings would have to be at least 10k to justify closing the Roth.