By Andy Ives, CFP®, AIF®
As we careen into the holiday season, there remains a deceitful underbelly of dirtbags operating their typical scams. Giant inflatable Christmas decorations in front of your home or a menorah in the window will not dissuade criminals from working a dishonest angle. “Good cheer” is the perfect cover for bad deeds. (See: The Grinch.)
Whether the leaves are changing, the snow is falling, or the summer sun is blazing, we must always be vigilant. Keeping watch over our possessions is, sadly, a year-round responsibility. Unfortunately, the bad elements occasionally maneuver through our defenses and gain access to our belongings. IRA accounts are just as susceptible to criminal activity as the cash in your wallet and the ornaments on your lawn. If your plastic reindeer are stolen or damaged in the night, you can always go to Home Depot and buy replacements. If your IRA assets are pilfered, what recourse do you have?
When IRA funds are mishandled or misappropriated, you may be able to roll over dollars received after bringing a lawsuit to recover the losses. In 2004, taxpayers sued an insurance company for improperly selling them certain annuities for their IRAs. They received settlements, and subsequent private letter rulings (PLRs) from the IRS allowed those amounts to be rolled over to their IRAs. In another example, an advisor stole former IRA funds from one of his clients in a nursing home after the IRA owner took a distribution. The IRS allowed the lawsuit settlement dollars to be rolled back to the IRA, thereby replacing the losses.
In later PLRs, the IRS began referring to settlement amounts paid back to IRAs as “restorative payments.” These restorative payments were not bound by the one-rollover-per-year rule or the 60-day rollover rule. This delineation between restorative payments vs. a standard rollover also allowed the IRS to avoid treating the payments as excess IRA contributions.
Be aware that “restorative payments” only include compensatory damages. Punitive damages and attorney’s fees do not qualify. Additionally, the payments can only be made to restore some or all of the IRA losses resulting from breach of fiduciary duty, fraud or federal or state securities violations (such as payments made pursuant to a court-approved settlement or independent third-party arbitration or mediation award). The IRS has specifically stated that “payments made to an IRA to make up for losses due to market fluctuations or poor investment returns are generally treated as contributions and not as restorative payments.”
Decorating the home, seeing loved ones, filling your belly with turkey and napping in front of the TV are high on most people’s holiday to-do lists. But maybe during some down time, consider a few tasks to help protect your assets. For example, be engaged and attentive. Check statements and records. Strive to have at least a basic understanding of IRAs and your accounts. Work with experienced financial professionals, and avoid handing over your financial and retirement reigns to a single person, even if that one person is a spouse or child.
Enjoy the holidays, surround yourself with good people, and make sure your 8-foot inflatable Santa (along with your IRA assets) are securely tied down. We don’t want any sticky-fingered pranksters running off with either.