Settlement by brokerage house for mishandling IRA investments
A 51 year old had her account churned by a broker making dicretionary trades that he was not authorized to do. She was reimbursed her losses for about $40,000 by the brokerage house and placed the money in her IRA. Is there any tax problems she should be aware of? Is it an early distribution? Can the money just be placed in her IRA with no particular issues?
Permalink Submitted by Alan - IRA critic on Thu, 2017-04-13 18:35
This is called a “restorative payment” and the IRS has issued several PLRs approving a rollover of such funds back into the IRA that incurred the loss, or another IRA if the prior IRA has been closed. Typically, this can be done by endorsing the check for deposit to the IRS AC# and sending it to the custodian. The custodian will treat it as a non reportable transfer and no 5498 will be issued reporting a rollover contribution. The legal firm handling the settlement will issue the check to the client’s IRA, not to the client and will not issue a 1099R. Therefore, this is treated as a non reportable transfer in all respects. If there are any special characteristics of the settlement such as punitive damages included, the disposition might be different. The legal firm should include an explanatory letter if such provisions apply.
Permalink Submitted by jacob roldan on Sat, 2017-04-15 20:32
My broker says that I can borrow money from my non-retirement margin account and use my IRAs as collateral? He also says that its tax free until I use up my non-retirement account and then have to pull money out of my IRA. Is this accurate? What makes this tax free?
Permalink Submitted by Alan - IRA critic on Sat, 2017-04-15 20:46
The broker it totally incorrect, and pledging an IRA account as collateral for any loan is a prohibited transaction that will result in a taxable distribution from the IRA. Therefore at the moment such an agreement is signed, a taxable distribution from the IRA is triggered. You should be eligible for a margin loan from your taxable brokerage account without any consideration of the IRA balance, but there are limits to the amount of that margin loan.