Stolen Funds out an Inherited Roth IRA Funds – What are options to still use Inherited Roth benefits??

Submitted by jayson yost on Tue, 2023-06-13 17:19

PLEASE HELP!!

The situation is:

I inherited a ROTH IRA in 2017 from my father.

In 2022, I invested a large portion of this Inherited Roth with a money manager; this money manager had significant trading losses and also funneled funds out of the account for his personal use (aka stole). He falsified and forged his entire trading record for the lifetime of the fund to the broker/dealer, auditor, custodian, and of course, his clients.

Therefore we never knew about the trading losses or the theft till the SEC filed charges.

I have a lawsuit pending against the broker/dealer, and the money manager’s trial is set for later this fall.

If you assume there are no recoveries (likely 0) from the original investment and that the only potential for recovery of funds is from the lawsuit against the broker/dealer. What are my options?

For example, if I receive funds from the broker/dealer as part of a settlement/lawsuit, can I ‘place’ (not sure if right word) these funds back into the Inherited Roth to maintain their tax-advantaged status?
Or can I personally fund the Inherited Roth with the original amount of capital I gave to the money manager out of my savings?
It would seem very unfair that if I give a registered rep Inhere Roth IRA money, then he steals it; I am the one that gets penalized via loss of the tax advantages status.

And then less of a pressing question, but since my annual RMDs were based on falsified balances, do I have any recourse to put that money back in the inherited Roth?

And lastly, is there anything else in the Tax laws that would allow us to minimize the financial loss either now or in the future from this theft?

Thank you!!! Any suggestions or ideas are immensely appreciated.

Jose



Submitted by Alan - IRA critic on Tue, 2023-06-13 17:47

  • Whether there is a class action suit or just your personal lawsuit, the only way to return the proceeds (after legal costs) to the inherited IRA is if the settlement is paid as a “restorative payment” in the form of a check payable to the custodian of the inherited Roth IRA FBO (you). Such a check can be endorsed over to the inherited Roth, is not treated as a taxable distribution, and at least some portion of the loss will be recovered. Note that you cannot claim a theft loss as an itemized deduction any longer, but there may be an exception if this scheme took on the characteristics of a ponzi scheme as perpetrated by Bernard Madoff. Refer to following link.
  • Any RMDs should be based only on the amount actually in the inherited Roth on 12/31 of each prior year. There is probably no way to restore inflated prior RMDs to the account unless they are part of any restorative payment and they probably will not be because your received those funds tax free, so only lost future Roth tax free deferral.
  • So, either a restorative payment, ponzi scheme theft loss, or some combination of both, if applicable. This will be complex and take some time.
  • IRS Tax Relief for Ponzi Scheme Victims | Nolo

Submitted by jayson yost on Tue, 2023-06-13 18:36

Thanks for the prompt replay – can you please point me in the direction of the source of IRS language that would allow for a ‘restorative payment” ? 

Submitted by Alan - IRA critic on Tue, 2023-06-13 19:07

  • Following is an article by estate attorney Bruce Steiner, outlining the development of the IRS acceptance of restorative payments.  Remember that no rollovers are allowed for inherited IRAs, therefore any restorative check cannot be made out to you, it must be to your inherited Roth and no 1099R can be issued.
  • KKWC-#191252-v1-Bruce_Steiner_Feature__Restorative_Payments.PDF

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