No, I did not make any non deductible contribution to the IRA. What do you mean by distribute the stock? The company did not invest the money in stock.
They money was loaned to the company, to be paid back with interest on return. I do intend to sue, but in the mean time I am having to pay a yearly service fee which is costly on money that is not there.
The money would not have been taxed as it was considered to still be in the IRA. Now the IRA has a zero value. You can cash out the IRS in kind meaning you take the assets of the IRA which are now valued at zero. This would dissolve the IRA and the tax would be on the value which is zero.
You would then own what ever the IRA had. A note or loan to the business of what I assumed was stock. Sorry for the assumption.
Then the note would be a personal asset, and if you do recover any on the funds, it would be personal capital gain. Not an IRA distribution taxed at ordinary rates and subject to penalty.
Because an IRA is funded with pre tax money, you cannot take any loss as any distribution would be gain by definition. For example, the IRA had $1 in it, the $1 would be taxed when distributed.
The only way to take a loss personally, would be to cash out the IRA in kind and to have a basis in it. Basis would be contributions that were made post tax and did not allow a tax deduction for the contribution effectively making it pre tax.
You stated that this is not the case so there is no loss you can take. The only thing to do is distribute the note (asset of the IRA) in kind. This would allow any recovery to be considered capital gain which is taxed at a much lower rate than a IRA and not subject to the penalty. Cash the IRA out, find an attorney, and try to recover.
The other option is to leave the IRA intact and try to recover. Down the road, distributions would be tax but could grow tax free for years.
The decision is up to you, but I would personally choose to cash it out in kind because of the tax benefits.
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