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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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I took money from my 401K/self directed IRA account and invested

Customer Question

I took money from my 401K/self directed IRA account and invested it with a company that is no longer in business and can no longer be contacted by phone or email. I have been scammed and have recently read complaints about this company scamming other out of their money. Since the money I invested have not been taxed how do I handle this situation when it's time to file my taxes? Please advise.

Thanks,
Ann
Submitted: 3 years ago.
Category: Tax
Expert:  Jax Tax replied 3 years ago.

Jax Tax : Typically, the investment firm would cover this or have INS. Your IRA is worthless. You can cash it out and the tax on zero is zero but do not do that yet. You need to sue. You may be able to take a loss. Did you make any non deductible contributions to the IRA?
Jax Tax : You need to withdrawal the IRA in kind meaning you take a full distribution. You distribute the stock and report at total withdrawal on 1099 holding the stock outside the IRA. Zero tax. Now if you recover any value on the stock it is capital gain and no penalty.
Jax Tax : The only way to take a loss would be capital loss up to the amoun on non deductible contributions.
Customer :

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.

Customer :

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.

Jax Tax :

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.

Jax Tax :

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.

Jax Tax :

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.

Jax Tax :

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.

Jax Tax :

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.

Jax 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.

Jax Tax :

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.

Jax Tax :

The decision is up to you, but I would personally choose to cash it out in kind because of the tax benefits.

Jax Tax :

Good day sir. I noticed that my answer was not accepted, and I was wondering if there was more information that I could provide you or if you had any additional questions. Please let me know if I can be of further assistance or I can open the question to other experts if I have been unable to help. The acceptance of an answer does not charge you. It simply provides me with credit for my response. Feel free to comment on my service as well. Thank you and have a great day.

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