ira settlements
My client received an IRA settlement for funds taken from his IRA by his planner.
$100,000 was the settlement of which the attorney kept $50,000.
The client is less that 59 1/2. I understand the client has to pay tax on the $50,000 that was paid to the attorney.
Does the 10% penalty apply?
Can the client take $50,000 from his savings and replace the $50,000 that was paid to the attorney and therefore defer penalty and tax? If yes, what is the time frame.
KI
Permalink Submitted by Alan Spross on Thu, 2010-07-22 00:51
The key is how much of the 100k is considered a “restorative payment”, as that is the max amount of the settlement that can be rolled over to the IRA as a restorative payment. These are typically not regular OR rollover contributions, but a class of their own under IRS letter rulings, and they should not generate a 5498. The actual breakdown is needed for the 100,000, and the client cannot add his own funds to roll over more than the actual restorative amount. You might also expect some challenges getting the IRA custodian to accept the funds unless they are a major brokerage firm used to handling these payments.
Client could get a 1099R or more likely a 1099 MISC from the managing attorney for the settlement. But the 1099 MISC should eliminate any early withdrawal penalty since the IRS should view it as a settlement rather than a retirement plan distribution. The 1099 MISC amount is taxable income and can possibly be offset by the amount of legal fees as a misc itemized deduction subject to the 2% floor and AMT limitations.
But these settlements can have their own unique instructions, so review the details carefully.