Reimbursed fees on IRA – taxable income?
I have a client who has a large IRA invested in an annuity. The advisor on the annuity has been sued for investing clients in inappropriate annuities. The State has determined the advisor is liable for all surrender fees the clients will incur to exit these inappropriate annuities. The advisor has to pay my client around $50,000 for the surrender penalties my client will incur upon transferring the IRA to another account. On his non-qualified annuities, there will be no tax consequences because the proceeds from the annuity will be less than his basis. Question: How should the $50,000 my client receives from the advisor for reimbursement of the IRA surrender penalty be reported on the tax form so it does not show as taxable income? The $50,000 from the advisor can’t be deposited to the new IRA account along with the proceeds from the annuity or it would be considered a contribution, right? Also, the $50,000 cannot be coded as a 60 day rollover because he will not have a corresponding 1099R showing the $50,000 was ever taken from the annuity in the first place? Thanks in advance for your advice and expertise! Kristin
Permalink Submitted by Bruce Steiner on Thu, 2008-01-31 04:04
Here is an article I wrote on this subject for Trusts & Estates magazine last summer: http://www.kkwc.com/docs/T&E_Wealth_Watch_News_August_2007.pdf
Permalink Submitted by Kristin Kippen on Thu, 2008-01-31 04:54
Wow thank you bsteiner! That is exactly what I was hoping for. How do you report on the tax form that the contribution is a restorative payment? Or do you just not report it at all? In this situation the advisor involved has stated several times that he will not be issuing a 1099 of any sort, but we want to be prepared even if he doesn’t issue a 1099.
Permalink Submitted by Alan Spross on Thu, 2008-01-31 05:37
Send evidence of the restorative payment to your IRA custodian and ask that it be processed as a rollover contribution. Custodians should be aware of the several PLRs that have allowed this, but in case yours does not, refer to one of those cited in Bruce’s article.
Also report the rollover contribution on line 15 of Form 1040 just as you would a normal rollover.
Permalink Submitted by Denise Appleby on Thu, 2008-01-31 07:49
It may be a good idea to have the custodian code it as a non-reportable deposit, so that no 5498 is issued. This will resolve any issues of unbalanced reporting ( a 5498 and no 1099-R). This may require some escalation to a supervisor or manager.
Take a look at PLR 200317048 mentioned in Bruce’s article. In PLR 200317048, the [url=http://www.retirementdictionary.com/restorativepayment.htm%5Drestorative payment[/url]was treated as a contribution.
Also look at PLR 200337017. In this PLR, payments were not treated as contributions and therefore not reportable.
Based on the information you provided, I think 200337017 would apply .
For PLR 200705031, also mentioned in Bruce’s article, repayments were not treated as contributions and therefore not reportable. However, it seems the use of the phrase ‘rolled over’ was misused here, as restorative payments should be nonreportable.
Permalink Submitted by Kristin Kippen on Fri, 2008-02-01 06:50
Great information! Thank you all for you help!