Legal Proceeds involving an IRA
I have a client who had invested $84,000 of IRA funds in Medical Capital Holdings, which turned out to be fraudulent (through another advisor, not myself by the way). The broker-dealer for the transactions was Securities America. She recently received a settlement through a class action lawsuit against the broker dealer, Securities America, of about $25,000 after attorneys fees. My questions are:
1. Can the portion that the attorney received be tax deductible?
2. Do these funds have to go back into her IRA, or is it considered personal, nonqualified money? I’m leaning more towards it being personal money, especially since the funds did not even come from the company where she had invested her money.
Thoughts?
Thanks,
Angela Bryant
Permalink Submitted by Bruce Steiner on Mon, 2011-10-17 16:51
Here is an article I wrote on this subject for the June 2011 issue of Trusts & Estates, which may be helpful: http://www.kkwc.com/library_cat/uf_Bruce_Steiner_Feature__Restorative_Pa…
Permalink Submitted by Angela Bryant on Tue, 2011-10-18 16:35
Thank you! That is extremely helpful!
Permalink Submitted by Angela Bryant on Thu, 2011-10-27 20:25
After giving it some thought, would the proceeds [i]have[/i] to go back into an IRA? My client is already in her 60’s. If she put is back into an IRA and then starts taking income out of it in a couple of years its going to be all taxable. However if she just deposits it to a personal nonqualified account then she will have a cost basis. Any ideas?
Permalink Submitted by Alan Spross on Thu, 2011-10-27 21:43
The payments do not have to be rolled back to the IRA as restorative payments. However, since the payments are made to reimburse investment or expense losses in the IRA they are taxable ordinary income if not rolled back to an IRA typically within 60 days of receipt. Granted, most of these payments are not reported on a 1099, although some might be reported on a 1099R or 1099 MISC.
With respect to basis, most payments are in cash. However, if you were to receive securities and did not complete a rollover then the cost basis would be the value of the securities when distributed to you, just as if you took an IRA distribution in securities instead of cash.
Permalink Submitted by Angela Bryant on Fri, 2011-10-28 01:05
Thanks!