Unregistered IRA fund and custodian

[Guest jblarson2002]

In 1997 I rolled my company 401K into an IRA and deposited it in a private investment fund. I took withdrawals in 2001 and 2002 and reported them as ordinary income and reported a 10% penalty as I am not yet 59.5.

Late in 2003 I learned that the neither the fund nor the principal were licensed with the SEC and was operating illegally and the principal has now been charged with fraud. The money is gone and myself and many many other retirees are broke.

My questions are: should I refile for 2001 and 2002 to redefine the invested money as a straight withdrawal of the basis rolled over from the 401K and how should I treat the 2003 withdrawals and penalities? Thanks in advance for any assistance with this.

[mbozek]

I dont understand your Q. Money rolled over from a 401(k) plan to an regular IRA is considered pre tax except for any after tax contributions tht your rolled over. The IRA withdrawals in 2001 and 2 were taxed to you because you received the funds. The amounts that were stolen by your advisor are not taxable to you but reduce the value of your IRA. Your withdrawals in 2003 will be deemed a taxable distribution. If any of the rollover was after tax then a pro rata amount of any distribution will be considered an after tax amount. You should consult a tax advisor to review your particular situation.

[Mary Kay Foss]

I don't think the answer is that simple. There was a court case a few years ago (Schoof 110 TC No. 1) where individuals rolled over benefits to a custodian not approved by the IRS. Even though the bogus custodian told the investors he was qualified, they were all taxable as of the date the funds were transferred to the bogus custodian.

I think that anything in excess of basis in the retirement plan is taxable in the year transferred to the unregistered custodian.

IRS is giving additional time to perfect a rollover that took more than 60 days if you apply for a ruling, I'm not sure that this is a case where that would apply. Contact Barry Picker or one of the experts that prepare private rulings.

Good luck!

[mbozek]

MK: Under IRC 6501(e) the statute of limitations for collection of tax for 1997 expires on April 15, 2004. If the funds have been stolen by the advisor it makes no sense for the taxpayer to ask for an extension of the rollover period. This is why the taxpayer should consult a tax advisor.

[John G]

Jblarson, you used the term "private investment fund". Can you provide some additional details about how you heard of this company? Did they represent themselves as a legitimite custodian? I am surprised that someone could operate without any registration... for example that your 401k custodian would transfer the funds to someone that was not known to them without check for their legitamacy.

You should talk to the district attorney for your area. There is a slight chance that someone that handled your funds had insurance. If anyone recommended this bogus firm, you may have recourse against them. You may have recourse against any bank or brokerage that handled their accounts, or any lawyers or accountants that advised them or audited their books. If the key personel knowingly committed fraud and violated the banking/SEC rules, then I believe you may have recourse against any of their personal assets, since they would not be protected by any incorporation laws.

Your situation is a cautionary tale for others at this site. Thank you for posting.

[Appleby]

Here is an article on a similar topic http://facreceiver.com/faclatimes18jan04.pdf about http://facreceiver.com/

[Guest jblarson2002]

That is me.