ira settlement
I have a client who had an ira with Putnam Funds many years ago that has long been rolled to my firm. He just received a check from Putnam that was a settlement from an Elliot Spitzer class action suit.( remember him?) He has maxed out on 2008 ira contributions. If he deposits it in the account what are the tax and reporting considerations?
Permalink Submitted by Janine Janine on Tue, 2008-11-04 14:36
If your client is eligible, why not open, or add to, a Roth IRA with the windfall up to $5000 ($6000 if he is over 50)?
Permalink Submitted by mk foss on Tue, 2008-11-04 17:52
The IRS has allowed “restorative payments” to be rolled over into IRAs. The regulations say it’s ok for qualified plans and private letter rulings have extended the treatment to IRA but there is no published ruling that I’m aware of.
There is normally no reporting on these payments although taxpayers must report ALL of their income. On tax returns I’ve reported such payments as capital gain when they’re received in connection with a taxable account and as ordinary income when they’re received on a tax deferred account.
If it is deposited into an IRA within 60 days, the custodian may report it as an additional contribution – which is exactly what you hope won’t happen. Perhaps someone at the custodian’s main office can confirm whether or not they would treat it as a rollover.
Permalink Submitted by Denise Appleby on Tue, 2008-11-04 20:14
Hello 🙂
…speaking from an operational perspective … Typically, the custodian requires a copy of the paperwork that accompanied the check, or some proof from the issuer – to show that the funds represent a settlement between the IRA and the issuer (Putnam in this case). The check would ( or should) be deposited to the IRA as a non-reportable transaction- like a credit for any earnings on investments. Make sure you talk to someone who is familiar with the procedure-you don’t want to have it done as a reportable transaction.
Side note: The issuer usually makes the check payable to the IRA ; but Putnam probably did not because the IRA is no longer with them and they are unsure of where it is.
Permalink Submitted by Bruce Steiner on Tue, 2008-11-04 20:34
I wrote an article on this for Trusts & Estates: http://www.kkwc.com/docs/T&E_Wealth_Watch_News_August_2007.pdf.
As the article indicates, there is now at least one private letter ruling on this in the context of an IRA.
The issue seemed sufficiently obvious that I don’t know why someone felt the need to get a private letter ruling.
Permalink Submitted by Denise Appleby on Tue, 2008-11-04 20:45
[quote=”[email protected]“]
The issue seemed sufficiently obvious that I don’t know why someone felt the need to get a private letter ruling.[/quote]
True. But you may be surprised at the push back some of these people receive from the IRA custodians- who are usually well intentioned and really believe that they are ‘protecting’ the IRA, the IRA owner and themselves. Often, they are unaware that it can be done. I have seen countless of these- and I can only imagine the larger percentage that do not get done or gets processed incorrectly because it was not escalated to the right person. Sometimes the customers feel they have no choice. Thank goodness for boards like these and for articles like yours.