IRA Conundrum

Submitted by Mel Langer on Sat, 2022-06-11 22:36

$40,000 investment made from traditional IRA account went bad. Financial Advisor sued, and attorney recovered $18,000, which was wired into non qualified checking account. Understand that a 1099 will be sent, making the entire $18,000 subject to immediate tax.

Is there a way to return the $18,000 to the IRA where it came from and truly belongs? That way it will be taxed as part of RMD’S taken annually.

Thank you.



Submitted by Alan - IRA critic on Sun, 2022-06-12 00:01

  • This is considered a “restorative payment” to the extent that punitive damages were not included in the 18k. However, typically the proceeds net of attorney fees are paid to the IRA and can be deposited as a non reportable restorative payment transfer with no 1099. However, in this case the 1099 to be issued is probably not a 1099R and will make the restorative process more difficult. The attorney might have mishandled the entire distribution process, and the 1099 might not even be a 1099R.
  • That could make it difficult for the taxpayer to convince the IRS that the 18k was sourced to an IRA and therefore to be credited to their RMD for the year. And to the extent it is credited to the RMD it cannot be rolled over anyway. 
  • Therefore, to determine how to proceed, the type of 1099 that will be issued needs to be determined and the RMD status for the IRA account that suffered the damages in the first place must be determined. Taxpayer also needs to determine if any amount in excess of the RMD will be accepted by the IRA custodian as a restorative rollover contribution. Therefore, a rather routine restorative payment transfer has been complicated by the attorney handling of the proceeds, the RMD situation, and possibly no rollover available.


Submitted by Mel Langer on Mon, 2022-06-13 06:10

Thank you for the explanation. If I returned the settlement payment to the attorney, and had them wire the money directly into my IRA, would that solve the problem? Then it would be a non reportable restorative payment. And the only thing I’d have to worry about is the attorney inadvertently sending me a 1099 for the money I’m returning. I am a little confused about paragraph 3 of your reply. My view is that if this $18k can get back into my IRA, then it becomes part of the IRA balance subject to a RMD. Said another way, when the loss of $40k occurred, then that amount reduced the IRA balance, and only what remained was subject to the RMD. If the $18k can get back into the account, then that will add to the balance, and of course be subject to a RMD…which is the way it should be. As always, appreciate your input.



Submitted by Alan - IRA critic on Mon, 2022-06-13 14:30

  • That would work as long as the 1099 is not issued. In fact, the attorney could  just reissue the check payable to your IRA, mail it to you, and then you could endorse it over for deposit to your IRA if your custodian understands restorative payments. There is a link below to an article from Bruce Steiner on restorative payments.
  • With respect to RMDs, with a non reportable transfer these funds would not be treated as an outstanding rollover and added to your 12/31/2021 balance for RMD calculation purposes. Your 2022 RMD would be calculated using the actual year end balance (as reported by your custodian). With the money returned to the IRA, your year end 2022 balance would be higher than otherwise, increasing only future RMDs.
  • KKWC-#191252-v1-Bruce_Steiner_Feature__Restorative_Payments.PDF


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