How to handle RMD for frozen IRA assets in Receivership case with Federal gov.

Submitted by Robert Mar on Thu, 2022-06-23 16:48

I had invested IRA funds in an investment that turned out to be a Ponzi scheme. I am unable to access the funds because they are frozen and the company that is involved has been placed in a Receivership with Federal government. There is no value in this IRA to be able to do the required RMD. This is my first RMD after turning 72.

How do I notify IRS to delay the RMD that will be required whenever any funds are recovered? The original custodian for the IRA sent me a RMD calculation based on the original invested amount, but it does not really represent the true IRA value that Is essentially zero until any funds can be recovered.

Thank,
Robert



Submitted by Alan - IRA critic on Thu, 2022-06-23 17:57

The IRA custodian must determine the value of your IRA as of 12/31/2021. If you think that value is much too high as of that date, appeal this to the IRA custodian. What other investments do you have either in the same IRA or other IRAs? While you cannot take a distribution from frozen investments, and in that case you can file a 5329 requesting any penalty waiver, if and when there is any legal settlement, that amount must be deposited back into the IRA. Right now all you can do is try to get the IRA custodian to revisit the prior year end value and amend the 5498 or valuation statement that they issued. 



Submitted by Robert Mar on Fri, 2022-06-24 16:44

I do have other IRAs at stock brokerages that have sent me RMD notices for 2022.  An outside IRA custodian was used to hold this single investment that is frozen.  This IRA custodian is aware of this investment being frozen and put in Receivership by the federal government, but they cannot officially restate the value of my IRA unless they receive notice from the lawyer that is handling the Receivership.  I have reached out to the lawyer to send them an update of this case indicating the lack of value at this time until the future settlements occur, which may take years. Otherwise, I will need to file form 5329 requesting waiver of RMD required for this particular IRA.



Submitted by Alan - IRA critic on Fri, 2022-06-24 18:15

  • A 5329 cannot waive the RMD, it can only request waiver of the 50% excise tax for not completing the RMD after the late RMD has been distributed in a later year. While you might be able to satisfy the RMD based on the inflated value of the frozen account by taking a larger distribution from your other IRAs, you would likely prefer that the 12/31/2021 year end value reported by the frozen account custodian be revised to 0 or some lower figure so that your total 2022 RMD would reflect a 0 value for the frozen account. 
  • Note that the litigation will probably not even consider establishing a market value on specific dates in the past including prior 12/31 dates, if you receive a restorative payment in the future (which would probably be a small fraction of what this investment might have been worth in the past), you can usually endorse the check back over to another IRA account, and that settlement would not affect the year end value reported by the custodian or prior RMDs.
  • As for simply reducing the RMD expected by the IRS due to 5498 reporting from the custodian, the only way to accomplish this is for the custodian to agree to re issue that 5498 reflecting a realistic value on 12/31/2021. The lawyer resolve this perhaps by providing the custodian a value, but it should be the 12/31 value, not the current value. The custodian is legally required to make an effort to determine the correct value at each year end, but are not required to go to extraordinary expense to do so in a murky situation like this that is time sensitive.  The custodian should probably at least show code G in box 15b.


Submitted by Robert Mar on Sat, 2022-06-25 16:50

Hopefully, the lawyer can provide the custodian the realistic value of this investment.  I believe the Receivership proceeedings were started in early 2020 when the investors were sent notification by the Receivership regarding what had occurred with our investments and that the investments were essentially frozen.  You are right that the recovery amounts of our investments will only be a small fraction of the original investment.  It is a messy situation and may take years to reach a final settlement.  Do you know if I did pay the overvalued RMD for this investment now, can some it be reimbursed by the IRS when this is finally settled?BTW, I just checked the letter that the custodian sent me in May regarding Form 5498.  It includes notification of the RMD amount due 4/1/23 from Form 5498.  Is is also stated: “Code B: Non-tradable debt”. “The code(s) reflect assets included in FMV where FMV is not readily available”The code is mentioned in the letter, but it does not show a box 15b.  Maybe, this is just a summation of the actual Form 5498 that will be sent to IRS and myself at a later date.



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