IRA rollover of IRA lawsuit settlement proceeds
A client’s husband convinced her to take $150,000 from her IRA with me, and invest it in an IRA with his advisor, several years ago. In 2008, they learned that this firm was a “Ponzi scheme”, and had absconded with the money, a la Bernie Madoff.
She hired and attorney and has recently settled with the law firm that wrote the prospectus. Her portion of the settlement will equal to the $150,000 that was “stolen”.
The settlement will go into her attorney’s firm’s trust account and be distributed to her from the trust account.
She wants to “roll” this back into her IRA, with me. Can we do this? If so, her attorney wants to confirm the proper coding for the 1099 that they will have to issue.
Any help will be greatly appreciated.
Permalink Submitted by mk foss on Tue, 2010-01-26 01:09
There have been private rulings that allowed this but only to the extent of the actual loss – no interest or damages could be added to it. The next question is whether the custodian will accept it – some will based on a PLR issued to another but many will not.
IRS will expect that this is reported on a Form 1099R – I’m not sure that the attorney would do that. I’m wondering why they would report it on Form 1099 anyway because it’s not income.
Permalink Submitted by Anonymous (not verified) on Tue, 2010-01-26 03:37
This is a difficult situation. Most custodians will not allow you to put the money back as a “transfer”. They will (must) accept it as a rollover. So you need to make sure you seek council with a tax advisor on how to communicate this to the IRS. Remember, the 5498 will come out following a rollover and the IRS will question it when they can not match it up with a 1099-R. Request your own PLR maybe or refer to similar PLRs in your explanation and take your chances???
pmk
Permalink Submitted by Alan Spross on Tue, 2010-01-26 05:11
I have had several of these on my Schwab IRA. They have all been the typical class action suits and each check has been made out to my Schwab IRA. I just endorse it over for deposit into the account and mail it to Schwab. Since the checks are made out to the IRA, they are transfers and I have never seen a 1099R or a 5498.
Last month I received one for $21, so decided just to take it to my bank and they cashed it even though it was made out to the IRA. I will be very surprised to get a 1099R on this, but like a good boy I will report it on line 15b.
Not sure what happens if the original IRA has been transferred to another custodian, but in that situation the check is probably made out to the individual and that is what triggers the rollover situation and possibly differing custodian reactions to accepting it.
There was a considerable discussion on the 72t site about the affect of these when the IRA account is now under a SEPP plan. A poster was wondering if they rolled it over that it would be considered a contribution and would bust the plan. That in turn hinges on whether the IRS would consider that your IRA included the unvalued litigation interest when the SEPP plan was started. Thinking that way it would not be a contribution, but there is no way to determine whether the IRS would grasp this concept.