Traditional IRA - how to handle worthless investment?

[Guest Troy S.]

Have a client with a traditional IRA that contains old investments that are now worthless (bond syndicates). Would like to distribute the investments basically as a $0 distribution to get the them off our books. Does this sound like a good way to handle this? In my mind, it would be a non-tax event correct? Thanks for any thoughts.

[Peter Gulia]

Assuming the IRA holder requests a distribution ....

If a distribution consists only of a delivery of worthless property, the instructions to Form 1099-R make clear that a report, while not required, is permitted, and may show a distribution amount of $0.00. See page 7.

Some practitioners consider doing a "zero" 1099-R a good idea because it creates a record that one could use as evidence of the delivery, and, if it was the only investment, the end of the account.

If you decide to do this, check your tax-reporting software: some include an assumption that zero can't be a distribution amount, and it might take a little time to figure out an override.

[John G]

Why? Why do admin work for no benefit? I can just imagine the explaination to an IRS auditor.... well, we just wanted to tidy up around here, you see the customer did not really benefit from the transaction.

I have 200 shares of a dot.com in a Roth that supposedly has a value of $0.01 and it can stay there forever. Its not bothering me and I wouldn't take 20 minutes to compose a letter. It reminds me of a dumb decision I made in 2001 and I value the reminder.