Loss in inherited IRA after 5 years
I inherited a Roth when my mother died in 2001. There was an investment in it in an L.L.C. that was worth $2/share at the time. This rose to $3/share by 2006, 5 years after my mother passed away. The company went bankrupt in 2012 and the shares are now worthless. Do a take a $3/share capital loss?
Permalink Submitted by Alan - IRA critic on Wed, 2013-01-02 22:26
Capital losses do not apply to IRA accounts. While your inherited Roth is now qualified and all distributions are tax free, if there was a way to determine the amount of contributions your mother made to the Roth, you could determine if the remaining value, adjusted for all distributions taken by either her or you exceeds the present total value of the Roth. If it does, and you fully distributed the Roth IRA this year, you could claim a misc itemized deduction subject to 2% of your AGI for the amount of loss. With a Roth IRA, a loss on a single investment is rarely severe enough to forfeit the remaining tax free growth by cashing in the entire Roth. That said, you might want to attempt to determine how much of a loss you have, if any, and whether you have enough deductions to itemize in 2013.
Permalink Submitted by Steve Weintraub on Wed, 2013-01-02 23:10
I have learned more since the original post. I should have taken a complete distribution from the Roth 5 years after my mother died. I thought that the Roth automatically dissolved at that point and became an ordinary investment. The LLC was the only investment in the Roth. What do I do now?
Permalink Submitted by Alan - IRA critic on Wed, 2013-01-02 23:50
You have not been taking annual RMDs at all?
Permalink Submitted by Steve Weintraub on Thu, 2013-01-03 17:54
No. I didn’t reaize I had to. There was only one investment in the Roth and it wasn’t liquid. I thought the Roth just converted to an ordinary investment after 5 years. I learned about RMDs for the first time when reading last night. Advice?
Permalink Submitted by Alan - IRA critic on Thu, 2013-01-03 18:50
Since the Roth IRA fair market value is around -0- at this point, you obviously cannot make up the missing RMDs. The excess accumulation penalty for not taking RMDs is 50% of the RMD for each year plus interest accruing on that unpaid penalty from each year forward. There is little evidence to date of the IRS taking a hard line approach to these penalties because they are so severe. You could do nothing and hope for the best or come clean and file Form 5329 for each year requesting the IRS waive the penalty for “reasonable cause”. The IRS would not have collected any taxes anyway on the RMDs and that probably improves your chances. The decision might rest on how good your reasonable cause is. Can you show that the Roth custodian never issued Form 5498 or other statement that indicated your RMD obligation?What is your estimate of the average year end balance for this Roth over the last 10 years?
Permalink Submitted by Steve Weintraub on Thu, 2013-01-03 20:19
Had I taken the full distribution 5 years after my mother passed away, would the basis for the loss been the value of the investment at the time of the distribution?
Permalink Submitted by Alan - IRA critic on Thu, 2013-01-03 21:58
To calculate the loss for a full distribution, you must know the total amount of contributions your mother made. From that figure subtract all distributions either of you took out. This is your remaining basis in the Roth. The amount this remaining basis EXCEEDS the value of the account when cashed in is the loss.That loss then must be reduced by 2% of your AGI and the remaining loss is then a misc itemized deduction. If you are paying the AMT, the loss is not allowed.
Permalink Submitted by Steve Weintraub on Fri, 2013-01-04 01:38
If I had taken the full distribution 5 years after my mother passed away, in 2006, wouldn’t the shares in the company have become an ordinary investment at that point and for tax purposes that is the point at which the basis for future tax purposes is determined?
Permalink Submitted by Alan - IRA critic on Fri, 2013-01-04 01:51
No. The only basis in a Roth IRA is the amount of contributions made by the Roth owner. Individual investment gains or losses only matter to the extent they affect the total value of the Roth IRA. If you had elected the 5 year rule for RMDs, you would have had to take the full distribution by 12/31/2006. Since that distribution would apparently been worth more than the Roth is worth now, you would have had a lower potential itemized deduction then than you would now. The RMD issues are totally separate from the deduction of losses issue other than the one year in which they would converge by taking a total distribution. What did not happen in 2006 has no present bearing on these two issues now.