Strong Settlement from ROTH IRA
Made the maximum $5,000 contribution to a ROTH IRA for 2010.
Received a check payable to me for the Strong Settlement.
Shouldn’t this be sent my ROTH IRA and considered earnings of the IRA?
If I cash the check is this a distribution from my ROTH IRA?
What are my options?
Permalink Submitted by mk foss on Sat, 2010-08-28 19:35
I received a check for the Strong settlement also. It was made out to my IRA. I brought it to my local Schwab office; they were very familiar with the situation and told me it would be entered as a “transfer” to my IRA. If I had already converted my IRA to Roth, I can’t see how it could have been treated as earnings and be tax free. Strong was acquired by Wells Fargo a number of years ago and the settlement relates to 2004 and earlier years so it would have no connection with a 2010 contribution.
If the check was made out to you and not your IRA – it looks like it could relate to a personal investment in one of the Strong funds; if that’s the case and you cash it – it would be capital gain from a recovery of your investment. If it relates to an IRA and it’s cashed; it’s treated as an IRA distribution taxable as ordinary income – unless it’s turned over to the custodian of an IRA.
Permalink Submitted by Alan Spross on Sat, 2010-08-28 22:25
I would only add that if you complete the transfer to your Roth IRA, it would not change your balance of regular or conversion contributions that you have made over the years (less distributions thereof). If your Roth previously contained earnings, it would add to that total. If your Roth was “underwater”, it would just be underwater by less or if the settlement was large enough it could change your Roth from being underwater to having some earnings. In other words, after completing the transfer if you took a distributon the next day your Form 8606 would still follow the ordering rules and your amount of regular and conversion contributions would remain the same as before the transfer.
If your Roth is already qualified, you don’t need an 8606 anymore and the settlement would just add to the tax free balance.
There are no available instructions to address the situation where you get this settlement and you already fully distributed your Roth in a prior year with the Roth not yet qualified. You could complete the transfer and the custodian distribute the settlement to you. They would code the 1099R appropriately, and you would have to attach an 8606, determine what the character of the settlement amount would have been on your prior 8606 and that would determine if it was taxable or not. Problem is that explaining this to the IRS in an explanatory statement that they would understand would be a real challenge.
I have recieved settlements this year that went as far back as 1999 activity, so there will apparently be an almost unlimited range of situations that apply in dealing with these settlements.
Permalink Submitted by Clyde Wolf on Sun, 2010-08-29 21:18
Thank you both for your reply and insight.
I always learn something reading your responses.