IRA lawsuit and settlement proceeds

[Guest ericbr]

IRA owner is duped by broker-dealer custodian.

IRA owner loses everything due to bad investment suitability from broker-dealer.

IRA owner sues and wins. Check is issued to IRA owner.

Are the settlement proceeds eligible to be put back into the IRA as a rollover, or some other means?

Thanks in advance,

Eric B.

[Appleby]

Check issued to IRA or IRA owner?

Generally, in circumstances such as these, the settlement is made payable to the IRA...not the IRA owner.

Present the instrument ( check etc.) to the IRA custodian/trustee, along with any documentation associated with the matter. The custodian may be able to determine if the payment is a “restorative payment” for the IRA ( which it sounds like it is)…restorative payments can be credited as a non-reportable transaction to the retirement account

[mbozek]

I think the client should retain a tax advisor to review the documents including the arb's decison to determine why the award was made before attempting to depsoit the funds in the IRA. There is no requirement that the custodian accept the funds for deposit in the IRA.

[Appleby]

The suggestion of consulting with a tax advisor is a good one… but I bet you ten to one, the tax advisor will refer the IRA holder to the custodian for the answers…tax advisors are knowledgeable about certain tax topics, some understandably are less so (knowledgable) when it relates to the operational procedures of retirement plans.

As mbozek stated, you may consult with a tax advisor… but ultimately, it is the IRA custodian/trustee that determines if and how the transaction will be credited to the IRA. Quite likely it would be referred to their legal counsel for review and decision…

[mbozek]

A: A good tax advisor can make a case for the IRA owner to persuade the custodian to accept the assets from the arbitration if the facts warrant such a conclusion and not just refer the client to the custodian.

[John G]

What chunk of change is involved? If this is a modest amount, the effort may not be worth any special actions. I the person was not currently making contributions, they could flow small amounts back in as "contributions". We don't know the magnitude of the issue here.

Generally, I agree that it makes sense to get the funds redeposited to a IRA, but why assume that you would keep the funds with the same custodian. I sure would not.

What kind of tax pro would refer you to a custodian for an answer? That is ducking the question. How about a tax attorney then? If it is determined that the funds can not be redeposited in an IRA, I would consider additional legal action over the damages. However, if the settlement already includes extra dollars rather than just a simple 1:1 restoration, then the arguement for a return to the IRA is weakened.

Perhaps the original person can clarify: big money or small, just a restoration or was there any additional kicker.

[Kirk Maldonado]

Appleby:

1. Given the breadth of possible topics that could be presented to a tax advisor (e.g., international issues, estate planning, sales and use taxes, etc.) a more charitable way of rephrasing what you should have said is that the person needs to consult with a tax advisor who understands retirement plans.

2. If the IRA custodian is presented with a legal opinion from reputable ERISA counsel, I would be willing to bet that they will not challenge it. Even if the IRA custodian brings in its own counsel in that situation, in virtually all cases counsel to the IRA custodian will defer to a legal opinion issued by a competent ERISA counsel.

[Appleby]

Kirk, I agree…