SETTLEMENT PAYMENT FOR IRA LOSSES: CAN THEY BE PUT INTO AN IRA TO AVOID TAXATION?
Hello,
A prospect has this situation. She had an IRA with a brokerage firm. This client was part
of a group law suit. They won the the law suit and she received 80% of her 100k, less the
35% attorney fee.
Since the funds at issue were IRA funds, can she roll this money into an IRA to avoid
taxation?
Any help greatly appreciated, she’s getting conflicting answers.
Brady
Permalink Submitted by Alan - IRA critic on Fri, 2024-12-20 17:42
Generally, they can. The payment is called a “restorative payment” and based on IRS RR 2002-45. If it comes as a check made payable to prospect’s IRA, it can usually be endorsed over to the IRA custodian and treated as a non reportable transfer. The issuing legal firm will usually not issue a 1099R, but if they do it could cause complications. Often the legal firm will provide a letter with the payment explaining some of these options.
If the check contains any punitive damages, that portion will probably not be allowed to be transferred back to the IRA without an IRS letter ruling, nor can the legal fees that were deducted from the check.
Hopefully, the IRA custodian here will understand the process and options.