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Did You Have a Loss of Funds in an IRA Thanks to Your Broker’s Illegal Transactions? This Week’s Q&A

This week’s Slott Report Mailbag looks into inherited IRAs, RMDs, illegal trades, and PLRs. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

Question:

My sister died at age 77. She left me as the only beneficiary. I am currently 70 years old. Do I take an RMD on my sister age or my age?

How do you figure this out? The total amount $127,000.

Thank you, Charles

Answer:

Hi Charles,

There are two possible answers here depending on whether you were named on the beneficiary form or if you inherited through her estate. It sounds as though you were named on the beneficiary form. Assuming this is correct, because your sister passed away after her required beginning date (April 1 of the year following the year she reached age 70 1/2) and you are younger than she was when she died, you will use your life expectancy to calculate your required minimum distributions (RMDs) from the inherited IRA.

You will take your age in the year following the year of your sister’s death and go to the IRS Single Life Expectancy Table. This can be found in IRS Publication 590-B. Find the multiple that corresponds to your age. For example, if you are age 70 in the year following your sister’s death, you would use a multiple of 17.0. Divide the multiple into the December 31 prior year balance of the inherited IRA. That will give you your RMD amount for the first year. In future years, you will reduce this multiple by one each year.

If you inherited the IRA through your sister’s estate, you would have to use her age to calculate your RMDs.

Question:

A 51-year old had a broker that made discretionary trades that he was not authorized to do and losses were incurred. As a settlement to a lawsuit, the brokerage house put the $40,000 losses back into her account. Are there any tax consequences, and is there any reporting she will need to do regarding this transaction?  Thank you

Wally

Answer:

The question of how to handle a settlement from a lawsuit when it involved a loss of funds in an IRA has been addressed by the IRS in a number of Private Letter Rulings (PLRs).

Can the settlement proceeds be rolled back to the IRA? IRS has said “Yes.” The funds would not be considered contributions and, therefore, would not be subject to the annual contribution limits. There would be no tax consequences to the IRA owner from the rollover of these settlement funds. Unfortunately, these PLRs are all we have to go on from the IRS. There has never been guidance issued on this issue or details as to exactly how the reporting would work. The PLRs all specify that only amounts that are considered losses can be returned to the IRA. Earnings on the losses and damages are not eligible to go into the IRA.