This week's Slott Report Mailbag looks into Casualty Theft, IRS rules, Medicare, and Roth conversions.As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
Hello. It has been some time since I’ve reached out to Ed Slott and your website for some help.
I have a question that I’m pretty sure I know the answer to but wanted an authority like Mr. Slott, if possible, to concur with me.
I have several clients’ that had investments in an IRA that ended up failing and were treated as Ponzi-scheme investments. The investments were in Medical Capital notes and was seized by the SEC and placed into receivership in 2009. The receiver just completed the final distribution and summary in December 2016. I am aware that these losses outside of an IRA are deductible as Casualty Thefts losses, but it appears that the IRS determined that they would not be deductible if held in an IRA. There appears to have been pending legislation in 2009 by Senator Schumer and again in 2010 by Representative Pascrell Jr. but it appears the bills never made it out of committee and therefore died. I can’t see that it ever was brought up again and signed into law.
Are you aware of any IRS rules which would allow the investors to deduct Casualty Theft losses in an IRA due to these Ponzi-scheme investments without completely distributing all similar IRA assets? These investments were all made with pre-tax dollars.
Any help and guidance would be greatly appreciated.
Thank you, Paul.
This one is pretty straight-forward. Losses are only deductible if there is basis. In general, traditional IRAs have no basis and thus, there are can no deduction for “losses” attributable to a Ponzi scheme. If there was basis in your client’s IRA and they take a full distribution of the IRA, and that distribution is less than the total amount of basis, then they may be able to claim a loss. You can check this article out for more on those specifics.
My husband and I are both 60 years old and will both be retired by this summer. We have a good problem that in being good savers our qualified pools of 401k and Traditional IRA have grown very large. We want to use the next 10 years to convert money to Roth’s (some each year) to reduce a looming large RMD at 70.5.
We are looking at several factors in trying to determine when to roll and how much. At what point does the IRS/Medicare use our tax return to determine if we will need to pay extra for Medicare and Part D? Is this on your return the year before you turn 65? Two years before? We might want to take larger amounts in our early 60’s and then lower the converted amounts once we get closer to Medicare calculation time. Can you please tell us when these supplemental penalties for Medicare and Part D are determined?
Of course, the market conditions will play a big part in how much we roll and when. A downturn will be a sweet spot to convert more.
In general, your Medicare Part B premiums are determined by using the income from your tax return from two-years-prior. There are certain cases where you can appeal to have Medicare re-evaluate premium increases (technically known as income related monthly adjustment amounts (IRMAA), but it doesn’t sound like your situation will qualify for such a change. You can find out more about appealing your Medicare Part B premium here.