Ask Terry Questions IRA – Church Bonds Defaulted

IRA – Church Bonds Defaulted

By Terry Savage on November 13, 2023 | Wild Card

I invested in Church Bonds in 2007 ($70,000) by rolling over my IRA account to purchase the bonds (issue date 2007 with 5 year term. The Church project was to relocate the church and school and build a retirement village outside of the city. The economy started a downturn in 2008, and by 2011, the Church had to file bankruptcy. The bondholders were devastated, and so many of us over the years have tried to ask accountants and financial advisers how this situation would be resolved. Even our financial adviser couldn’t answer our questions, and until a couple of years ago, I just filed the annual statements and forgot about the IRA account. Several pastors later and several custodians later, along with a dwindling church membership mainly of retirees on fixed incomes, it is now apparent that the Church will never be able to pay the bondholders. Coupled with that, I am now receiving notices from the current custodian that I am required to take an RMD from my account. When I signed the request for the RMD, I received a letter stating there was no cash in the account, and that I could take the RMD from another account or re-register the amount of the RMD into my name and just pay the tax on the RMD. My IRA was a traditional account with pre-tax contributions. I understand that IRS wants to start charging income tax on the tax benefit that I received when I put money into that tax deferred account over the years. I, along with so many others, just want to make sure we follow the best route to meet our tax obligations. I can do the re-registration annually to minimize the amount of tax to be paid each year, but I am 73 years old. I also had a stroke three months ago, and I don’t want my family to have to deal with this each year if possible. One article I read was to get the Bankruptcy and Church officials to state that the Church will never be able to pay the bonds and just declare the bonds worthless. My main question – If the bonds are declared worthless, do I have to report the account value as income in one year, and then possibly qualify for a minimal investment loss each year? If that is the case, maybe I am better off just re-registering the RMD in my name each year. Do you have any other suggestions or comments that could help us? Thank you so much for your time.

Terry Says

This is complicated, but let’s start with the basics. First of all, your RMD is based on the CURRENT VALUE of your investments inside the account. So suppose you own a mutual fund that you bought earlier for $25,000 in your IRA. Today it is worth $50,000. You get no tax advantage for the gains, but your RMD is based on the current value of your account, which is $50,000.

Now, let’s see what would have happened if you invested in that stock fund with $50,000 — and took a big loss. Today the fund value is $25,000. Your RMD is based on the current value of $25,000.

YOUR PROBLEM is that there is no current valuation for those bonds. But if the Church filed for bankruptcy, you need to see an attorney to read those documents to find out if they officially defaulted on those bonds as part of the bankruptcy estate. Contact the attorny of record for the bankruptcy and get it IN WRITING if those bonds were officially defaulted.

If that were the case, their current value would be ZERO. Then, they would not have any value in calculating your RMD.
However, if the bonds were NOT included in the bankruptcy at the time, then you and your fellow bondholders should find an attorney to force the Church to declare a CURRENT VALUE for tax purposes. If, as likely, they do not intend to repay these loans, then you should get it in writing that the current value is ZERO!!

I have no idea what IRA custodian allowed you to invest in such a ridiculous scheme as Church Bonds. BUT, this information about the current value should be presented to the IRA CUSTODIAN. THEY must report the value of your IRA to the IRS every year. And THEY should report it as zero.

And if you can’t get them to act on this information, please write back to me. You can let them know that I will be delighted to write about their lack of fiduciary duty in first letting you invest and acting as custodian, and second their negligence in reporting a zero value of this asset to the IRS. That will cause them a lot more trouble — and likely a significant penalty, if not putting them out of the “custodial” business.

They need to handle this revaluaton of the bonds to their current value for ALL of the accounts for which they act as custodian. It’s potentially such a big story, that I promise to hand it to my friends the Wall St. Journal. Feel free to show them this response!



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