Distributions Paid into previously closed / zeroed out Traditional IRA

Submitted by Wei Wang on Tue, 2022-11-22 15:54

I have a hypothetical client named Joe. He owns a non-tradable stock called Zeta (an interest in a liquidation trust) in his Traditional IRA. It stopped trading as of 01/04/2021. He did a Roth IRA conversion and converted all of the funds and assets in his Traditional IRA into his Roth IRA in mid-2021, and already paid the associated federal and state income taxes. Zeta was marked at $1.00 per share at the time of the Roth IRA conversion.

The Zeta liquidation trust subsequently paid out two interim distributions in 2022: one for $0.50 per share and one for $0.25 per share. However, they paid it based on shareholders of record as of 01/04/2021, and the payments went into the previously zeroed out Traditional IRA account.

How should Joe resolve this if he wants to move the money from the Traditional IRA into the Roth IRA again using a conversion? Is there a way to avoid the “double taxation”?



Submitted by Alan - IRA critic on Tue, 2022-11-22 18:16

He would have to convert the TIRA, but the value converted earlier did not contemplate these settlements, so I would not consider this to be double taxation.  This is somewhat analogous to the conversion of a stock after going ex dividend.

Submitted by Wei Wang on Tue, 2022-11-22 18:28

If this was in a taxable account, the subsequent interim distributions would be considered return of principal (notice the $0.50 and $0.25 sum up to less than $1.00 per share of the original mark), so I think it is considered double taxation and I don’t think he should pay income taxes again.  If a stock goes ex-dividend, custodians usually record an “accrued but unpaid dividend.”  When you then convert from Traditional to Roth, you pay income taxes on the “accrued but unpaid dividend” portion too.

Add new comment

Log in or register to post comments