IRA Rollover?
AS a result of a class action suit, my client received a settlement check for a stock held in an IRA. The legal team handling the case made the check out the the custodial,,,FBO “the client”. The initial check was posted by the firm as an IRA rollover. The legal team insists that the check could not be titled to the client alone, that they were obligated to make it out the the custodian firm.
Now a second settlement check has come, only 5 months after the initial check. The client has the check, cannot cash it, so is obligated to send to the custodian for the IRA. It cannot be coded as a rollover, since that would be 2 in one rolling 12 month period. The client is 70 yrs old, and retired, i.e., no earned income. What is the best way to handle the 2nd check, and possibly future checks from the settlement?
Thanks for your suggestions
Permalink Submitted by Alan - IRA critic on Wed, 2021-09-08 14:51
These payments (known as “restorative payments”) are not distributions or rollovers, they are non reportable direct transfers and not subject to the one rollover limitation. There should be no 1099R issued by the settlement firm and no 5498 issued by the IRA custodian. The custodian should not have posted the first payment as a rollover since that is incorrect, but there is time to request that the custodian recode the checks as transfers. If the “rollover” coding is needed for their processing platform, that is OK as long as they accept the second check and confirm that they are not going to issue a 5498. Perhaps letters from the settlement firm will also confirm that they will not issue a 1099R. Again, if a check is made out to “custodian FBO client” it is not a distribution despite being mailed to the client for delivery. These checks should be endorsed over by the client for deposit to the IRA.