IRA or Roth IRA Fees

[S T]

Have a situation, where the Clients IRA and Roth IRA account (assets) are in receivorship. Client has an option to hire legal counsel to try to protect the Assets in their account

Client will have to hire an attorney -

IRA account is frozen - so the client will have to pay fees personally to try to seek recovery - Would this fee be deductible as it is paid outside of IRA

Roth IRA account is not frozen - can taxpayer direct legal fees to be paid from the Account - these fees would not be deductible - as the Roth IRA is post tax, would that be correct?

Thanks,

Sandy

[Koss]

Receivership

How did this guy get himself into this situation?

Why is he in a receivership, and how did the retirement accounts get pulled into it?

Where are we going? And why are we in a handbasket?

This may not be relevant, but it could be, and you won't know unless you ask.

Personal legal expenses generally are not deductible. So you can't deduct legal fees for personal bankruptcy, divorce, criminal matters that have no connection whatsoever to your business, etc.

You can take a deduction for legal fees that are associated with the production of taxable income. So, for example, if you pay an attorney to evaluate an LLC operating agreement because you are considering making an investment to become a member of the LLC, that may well be a valid deduction. And that may be what you are thinking of when you say that legal fees associated with a Roth IRA are not deductible, but legal fees associated with a traditional IRA may be deductible. But I don't think you're talking about legal fees associated with the production of taxable income. The assets in the IRA are going to make money, or lose money, independently of the receivership. He's not hiring the lawyer to help him make decisions about how to invest the assets in the IRA. He's hiring the lawyer to try to get the assets out of the receivership. The fees are not associated with the production of income; rather they are associated with some assets that happen to be in a tax-deferred account.

If the receivership is associated with a business activity, then the legal fees might be deductible somehow... For example, on Schedule C, or Schedule E, or maybe as unreimbursed expenses of a partner, or... on the tax return of a business entity that is somehow involved in the receivership. But I don't see it being a deductible personal expense, or as an investment expense.

BMK

[S T]

IRA accounts were established with a Pension Firm - with a high rate of return - and somehow took those funds and invested in Natl Note Utah - now under receivership and State of Utah and SEC is involved.

I don't quite understand it all - but the funds are frozen appears as a "ponzi scheme" Their are holding companies, real estate, trust deeds etc involvled, and claims under Natl Note will be unsecured claims based on the Receivor notice.

In the meantime the Pension Administrator is suggesting that the individuals hire legal counsel to protect or recover what they can from the Receivership in charge. Pension Adminstrator is stating they have no Fiduciary Capacity to recover any such funds

Sandy

[Koss]

Ponzi Scheme

Okay, that makes sense, and it does change my perspective a little bit...

Initially, I thought that your client was somehow in a receivership. But that's not the case at all. It sounds like even the financial institution in which your client placed his IRS funds is relatively innocent here. Apparently, the financial institution your client selected--which you are referring to as the "pension firm" or "pension administrator," chose to put your client's funds into something that wasn't really a legitimate investment. And now those accounts have been frozen.

If your client recovers some, but not all of their investment, and the whole thing was really a scam, and not just a bad idea that lost money, then your client probably has a casualty loss. There are some safe harbor rules for losses on fraudulent investment schemes. The canonical example is people who lost money in the Madoff affair.

But wait a minute... the loss is taking place inside an IRA... Which brings us back to your original question, plus the question about the legal fees...

If I put money in a traditional IRA, and then have it invested in something that turns out to be a scam, and I lose half the money, I don't have a deductible loss because the money was pre-tax to begin with. The money that I lost will never be taxed because I'm never going to see it again. In theory, it would be taxed when I take it out of the IRA. Since I'm never going to be able to take it out, it will never be taxed. I already got a deduction in the year that I put the money into the IRA.

But I think you already understand that, which is why you were asking about the Roth, and the attorney's fees...

Hmmm...

Guess I need to think about this one some more. Your client is definitely the victim of a scam. But the fact that it is inside an IRA, and that there may be legal fees involved, makes it more complicated...

BMK