Retirement account losses
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Dear Tax Talk,
I had some heavy stock losses as a result of bad investment advice from the broker that set up the plan with my employer. I’m about to receive a settlement from my attorneys, net of their fees. The losses were in my retirement account, which is now an IRA. Since the payment will exceed the annual contribution limit, how will my payments be handled? Do I have to take the amounts as a distribution and wait to put them back?
— Jeremy
Dear Jeremy,
Your attorneys can issue a check directly to your IRA custodian as a restorative payment. Neither the payment nor the attorney’s fees will be considered income to you in the year it is contributed to your IRA. Neither will the payment be considered a deduction to you nor otherwise limit your annual contribution to the IRA.
You’ll pay tax on these amounts only when you begin to take distributions from your IRA. Although the payments exceed the annual threshold, your IRA custodian can accept the payments under the concept of restorative payments.
Revenue Ruling 2002-45 addresses the exact question you present. A plan administrator owes the plan participants a fiduciary duty to conservatively invest the assets of the plan so that they may be available to the participants upon retirement.
When a fiduciary breaches that duty, she carries a risk of liability for plan losses. If a fiduciary either under suit or in belief of responsibility restores those losses, these payments are considered restorative contributions.
Because a restorative payment is not commonplace, your IRA custodian may have difficulty accepting the payment within their systems. I suggest you refer them to the IRS revenue ruling for guidance.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
