Life and Death Planning for Retirement Benefits

390 / 507

390 Life and Death Planning for Retirement Benefits
D. Ways to deal with a loss (other than deducting it). If the losses were caused by someone
else’s malfeasance, see regarding the possibility of suing the wrongdoer and
depositing the lawsuit winnings in the IRA as a “restorative payment.”
If the loss occurred after and with respect to a recent Roth conversion, see ¶ 5.6 regarding
the possibility of “recharacterizing” the Roth conversion as a contribution to a traditional IRA.
Another approach to losses is to keep the account alive and hope it recovers its value.
8.1.03 Restoring lawsuit winnings to IRA
When an IRA owner has a claim against an investment advisor or firm for losses in
connection with products or services provided to the IRA, perhaps the lawsuit should be brought
by the IRA custodian as plaintiff rather than by the IRA owner. However, apparently, the IRA
owner often or always is the named plaintiff. When the IRA owner recovers, he seeks to have the
money restored to the IRA. How can this be done without constituting an excess IRA contribution
?
The IRS (typically via the “late rollover” procedure; se allows the IRA owner to
contribute this type of recovery to his IRA as a “restorative payment.” The concept is that the
recovered amount is replacing losses due to fraud or other breach of fiduciary duty. Rev. Rul.
2002-45, 2002-29 IRB 116; PLR 2006-04039.
See, for example, 11 apparently related PLRs, in which the IRS ruled that the IRA owners’
net proceeds from such a lawsuit (which they received in their individual names) could be
deposited in their respective IRAs, and these deposits would be treated as tax-free rollovers.
Apparently the date the defendant coughed up the money was considered the date of the
“distribution” from the IRAs, because the IRS said the owners had 60 days from that date to
complete the rollover. PLRs 2004-52043–2004-52046, 2004-52048–2004-52054. PLRs 2001-
21034 and 2005-34026 are similar.
The ability to contribute (or “roll over”) a “restorative payment” to an IRA applies only to
the compensatory payment for the actual investment loss; it does not extend to any portion of the
award or recovery that represents attorneys’ fees or court costs (see PLR 2007-24040), or interest
on the damages award (PLR 2009-21039). It can apply to a payment received from the defendant
in a good faith settlement and/or arbitration (see PLRs 2007-24040, 2009-21039) as well as a
litigation recovery.
However, this principle does NOT allow the IRA owner to deposit his own funds in the
IRA to make up for investment losses, or even for losses caused by the malfeasance of others (PLR
2001-51051).
8.1.04 Paying, deducting, IRA investment expenses
This section discusses payment of IRA management expenses using outside funds.
A. Payment of IRA expenses. If the IRA owner pays, from his taxable account, ordinary and
necessary expenses that are incurred for the management of the IRA’s investments, and
that are billed separately to the IRA owner, such payment is not considered a contribution
to the IRA for purposes of applying the limits on IRA contributions . Rev. Rul.
84-146, 1984-2 C.B. 61. However, brokerage commissions and similar transaction costs