Do restorative payments need to go through a custodian when they are deposited into a retirement account?
Two questions came up as victims are trying to find a way to deposit this:
1. What would happen if someone had their restorative payment deposited into the checking account for their retirement account (in the LLC checkbook control model)? Does the deposit have to be documented by the custodian or is it okay to deposit in the retirement account’s checking account if good documentation is kept by the account owner? We could get documentation from the DOJ that its restoring assets stolen from our retirement account in an amount that’s allowed to be put back in our retirement account.
2. What would happen if the deposit was made into a nonretirement account and it wasn’t rollover back into the retirement account? Is there IRS guidance or precedence that a restorative payment must be put back in the retirement account?
More details: Assets were stolen from many self-directed retirement accounts (of various types: Trad IRA, Roth, 401k, etc) at Company X. One of the hackers involved had a criminal trial and victims are being paid restitution from the assets that were recovered (less than the full amount stolen). The DOJ in this state does most of its transactions through EFTs. They don’t have the option of doing a wire and they don’t recommend doing via check because they’ve had some stolen in the past (and some of these checks will be very large). Company X has provided a way for victims to send them an EFT so they can deposit the money back at their retirement account there. But many victims closed their accounts or don’t feel safe having their money returned to the place it was stolen from. I received some helpful answers about how to receive a “restorative payment” at another financial institution from this discussion group. My current custodian accepts a restorative payment as a wire or check to them FBO my retirement account and they would treat it as a nontaxable transfer. Unfortunately, they don’t accept transfers via EFT. I have a checking account for my retirement account there and they said if I got an EFT there it would by pass the custodian and not get documented as a transfer which might have tax consequences. Other custodians also would only accept restorative payments via wire or check. EFT doesn’t seem to be supported by any custodians except Company X.
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Permalink Submitted by Alan - IRA critic on Thu, 2025-03-20 21:50
The only guidance on restorative payments from the IRS is limited to about a dozen PLRs over the last 20 years. Most of these relate to how much of a settlement is a restorative payment and deals with attorney fees and punitive damages. None of these PLRs address the mechanics of the deposit of the restorative payment.
Over the years, many checks were made out to the plan from which the loss occurred FBO participant. These checks could be endorsed over for deposit as a restorative payment transfer, not a rollover. There would no 1099R or 5498. The deposit is more difficult if the account has been closed, but opening a new account with the IRA custodian (the payee on the check) would also be easier than opening a new account elsewhere.
Therefore, the best way to deal with any restorative payment depends on the method of issue and the willingness of the IRA custodian to accept the restorative payment as a transfer. If the check is payable to the participant directly (more likely to generate a 1099R), it could also be endorsed over by the participant, but once the check is cashed and deposited into a checking account, the acceptance of the rollover payment will be more challenging.
Therefore, there are many variables to mix and match the payment with each possible custodians policy on restorative payments, which they generally do not publish. In this case, if a better outcome is not available, the taxpayers may have to resort to having the EFT made to Company X, then transfer that balance out of X right after the deposit has been made. Of course, there could be an exit fee due.