I have done years of taxes for someone (call her DS) who was apparently psychologically unable to do her own taxes. She is a retired widow whose husband died tragically of cancer over 20 years ago. She lives on Social Security and a small pension from her deceased husband.
Usually her taxes are simple because her income is low. But yesterday DS sent me her envelope with a 1099-R that reported a $63,000 distribution with Box 7 showing T. That’s a Roth IRA distribution where the fiduciary issuing the 1099-R doesn’t know whether the Roth has been held for more than 5 years which would make the distribution tax-exempt.
With due diligence, I phoned DS to confirm that she had opened the Roth more than 5 years earlier. She confirmed that.
Then I said, “Now you received the $63,000, right?”
She said, “No, I didn’t receive any money. This is a self-directed Roth IRA. I sent them $75,000 when [my husband] was sick with Stage 4 cancer and his chemo was costing $10,000 per week. I needed money fast and this was a high-risk investment. The fiduciary has been charging me $750 per year since then to maintain the account. I decided I wanted to close the account because I didn’t want to keep sending $750 per year. They sent me this 1099-R but didn’t send me any money. They said they were a “middleman” and it would take a lawsuit to get the money back. I can’t afford a lawsuit so I’m just letting it go.”
How many different ways is this situation FUBARed???
I don’t really want to get involved so I put $75,000 as the cost basis on Form 8606 and the taxable amount as zero.
But what in the world is going on here? Has anyone ever heard of a 1099-R distribution but no actual cash distribution?
It sounds like they invested her in something like a private REIT that has very restrictive redemption rules. Self-directed IRAs are set up to allow people to make investments like this that can’t be made in IRAs held by places like Fidelity or Vanguard. To understand why they would not send any money back, you would have to get the investment prospectus (assuming there was one) and read the redemption rules.