IRA Stolen–Do I still have to pay the 10% Penalty?

Submitted by Troy Johnson on Tue, 2022-09-27 15:46

Hi–this is a horrible story.

I drained my IRA about 2 months ago and invested in what I thought were crypto futures. In the end, the money was totally stolen. Thieves plus scam equals my completely wiped out.

The question I have is sense there was a crime committed and I never really received the money as income. Is there a way to avoid the 10% automatic penalty?? Or did I just lose everything and still owe the government even more?



Submitted by Alan - IRA critic on Tue, 2022-09-27 16:34

  • Sorry to hear of this disaster. Unfortunately, if you took a distribution from your IRA and then invested the money outside your IRA, you will get a 1099R and owe taxes on the IRA distribution, and the 10% penalty also unless you separately qualify for a penalty waiver unrelated to the scam. Conversely, if you invested IRA money into a bad investment without taking a distribution, the loss would have been pre tax and there would be no 1099R.
  • Since this was apparently a criminal scam rather then just a bad investment, if the perpretrators are apprehended and funds are recovered, you might receive some recovered money. However, that would be post tax, and you would still owe tax and penalty for the IRA distribution.
  • Deductions for theft losses were suspended starting in 2018, therefore there is also no deduction available as a theft loss. 
  • If this happened to you, it also happened to others. If these losses are widespread, they will get more attention from the SEC or other law enforcement agencies. If so, there might be some recovery, but it would take a long time before you would receive such funds.

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