Settlements in an IRA


K

Kurt Ullman

I just got a thing saying I was eligible for some payment from a
fund Schwab put up to settle some kind of SEC complaint. The funds at
issue were all in IRAs. When I get my settlement(s) can I cash the check
or do I need to put it in the IRA. How do I characterize that since it
wouldn't be a 2012 contribution (or would it?)
 
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A

Arthur Kamlet

I just got a thing saying I was eligible for some payment from a
fund Schwab put up to settle some kind of SEC complaint. The funds at
issue were all in IRAs. When I get my settlement(s) can I cash the check
or do I need to put it in the IRA. How do I characterize that since it
wouldn't be a 2012 contribution (or would it?)

The settlement check should be payable to the IRA and should be
deposited in the IRA as a settlement check, not a new contribution.
 
K

Kurt Ullman

The settlement check should be payable to the IRA and should be
deposited in the IRA as a settlement check, not a new contribution.
Thanks.
Kurt
 
J

joeu2004

Arthur Kamlet said:
Kurt Ullman said:
I just got a thing saying I was eligible for some
payment from a fund Schwab put up to settle some
kind of SEC complaint. The funds at issue were all
in IRAs. When I get my settlement(s) can I cash the
check or do I need to put it in the IRA.
[....]
The settlement check should be payable to the IRA and
should be deposited in the IRA as a settlement check,
not a new contribution.
I got checks for similar, but separate settlement payments received in July
2011, all related to the Schwab funds like the SEC settlement.

The checks were payable to John Doe / Charles Schwab & Co Inc Cust / IRA
Contributory (or IRA Rollover). There was an annotation like "Re: Acct #
xxxxxxxx".

In some cases, the noted IRA is closed. What to do then: deposit IRA
settlement payments into any now-existing IRA even if Schwab is not the
custodian, again not as a new contribution?

Following comments (um, "not advice" ;->) in this forum, I reported the
settlement payments as non-1099B long-term gain (i.e. box C on Form 8949)
since they represented a "recognized loss" in NAV. (I don't know yet what
the SEC settlement payments will represent.)

Although that does seem appropriate for settlement payments in re taxable
accounts, I now see the error of that approach for settlement payments in re
IRAs per se.

What should I do now, 10 months later?

Can the funds still be deposited into IRAs, even though the checks were
cashed?

Or must they now be treated as an IRA distribution?

If the latter, if I file an amended 1040, should I treat such
"distributions" as ordinary income like other IRA distributions, not box-C
long-term gain?

(All of the IRA contributions were deductible.)

If so, would it be reported as other income (1040 line 21), not as IRA
distributions (1040 line 15a) since there is no 1099R?

On the other hand, my 2011 taxable income was zero. And the amended taxable
income would still be zero due to excess itemized deductions.

So I am tempted to wait and see if the IRS catches the mistake within the
next 3 years. Even if they do, I believe the interest on the amended
__zero__ taxable income would zero. Right?
 
B

Bill Brown

Arthur Kamlet said:
Kurt Ullman   said:
I just got a thing saying I was eligible for some
payment from a fund Schwab put up to settle some
kind of SEC complaint. The funds at issue were all
in IRAs. When I get my settlement(s) can I cash the
check or do I need to put it in the IRA.
[....]
The settlement check should be payable to the IRA and
should be deposited in the IRA as a settlement check,
not a new contribution.
I got checks for similar, but separate settlement payments received in July
2011, all related to the Schwab funds like the SEC settlement.

The checks were payable to John Doe / Charles Schwab & Co Inc Cust / IRA
Contributory (or IRA Rollover).  There was an annotation like "Re: Acct #
xxxxxxxx".

In some cases, the noted IRA is closed.  What to do then:  deposit IRA
settlement payments into any now-existing IRA even if Schwab is not the
custodian, again not as a new contribution?

Following comments (um, "not advice" ;->) in this forum, I reported the
settlement payments as non-1099B long-term gain (i.e. box C on Form 8949)
since they represented a "recognized loss" in NAV. (I don't know yet what
the SEC settlement payments will represent.)

Although that does seem appropriate for settlement payments in re taxable
accounts, I now see the error of that approach for settlement payments in re
IRAs per se.

What should I do now, 10 months later?

Can the funds still be deposited into IRAs, even though the checks were
cashed?

Or must they now be treated as an IRA distribution?

If the latter, if I file an amended 1040, should I treat such
"distributions" as ordinary income like other IRA distributions, not box-C
long-term gain?

(All of the IRA contributions were deductible.)

If so, would it be reported as other income (1040 line 21), not as IRA
distributions (1040 line 15a) since there is no 1099R?

On the other hand, my 2011 taxable income was zero.  And the amended taxable
income would still be zero due to excess itemized deductions.

So I am tempted to wait and see if the IRS catches the mistake within the
next 3 years.  Even if they do, I believe the interest on the amended
__zero__ taxable income would zero.  Right?
The 10% penalty for early withdrawal (that is what you would have)
would make that a non-zero tax due return. Therefore, late payment
penalty and interest would also be assessed.

Whether it is too late to put cash into another IRA (as a roll over)
depends upon how long ago you got the check.
 
P

Phil Marti

I got checks for similar, but separate settlement payments received in July
2011, all related to the Schwab funds like the SEC settlement.

The checks were payable to John Doe / Charles Schwab & Co Inc Cust / IRA
Contributory (or IRA Rollover). There was an annotation like "Re: Acct #
xxxxxxxx".

In some cases, the noted IRA is closed. What to do then: deposit IRA
settlement payments into any now-existing IRA even if Schwab is not the
custodian, again not as a new contribution?
The thing to do at the time was get the checks reissued or deposit them in a Schwab IRA.
Following comments (um, "not advice" ;->) in this forum, I reported the
settlement payments as non-1099B long-term gain (i.e. box C on Form 8949)
since they represented a "recognized loss" in NAV. (I don't know yet what
the SEC settlement payments will represent.)

Although that does seem appropriate for settlement payments in re taxable
accounts, I now see the error of that approach for settlement payments in re
IRAs per se.

What should I do now, 10 months later?

Can the funds still be deposited into IRAs, even though the checks were
cashed?
No. The checks were, in effect, IRA distributions which could have been rolled over, but only within 60 days.
Or must they now be treated as an IRA distribution?

If the latter, if I file an amended 1040, should I treat such
"distributions" as ordinary income like other IRA distributions, not box-C
long-term gain?
Line 15 IRA distributions. It doesn't matter that there's no 1099-R.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
 
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J

joeu2004

Bill Brown said:
The 10% penalty for early withdrawal (that is what you
would have) would make that a non-zero tax due return.
AFAIK, the 10% penalty does not apply to a person over 59 1/2 and before 70
1/2. I'm in between.


Bill Brown said:
Whether it is too late to put cash into another IRA
(as a roll over) depends upon how long ago you got
the check.
I wrote: "I got checks for similar, but separate settlement
payments received in July 2011".

And I wrote: "What should I do now, 10 months later?".
 
A

Arthur Kamlet

The thing to do at the time was get the checks reissued or deposit them
in a Schwab IRA.


No. The checks were, in effect, IRA distributions which could have been
rolled over, but only within 60 days.


Line 15 IRA distributions. It doesn't matter that there's no 1099-R.

In particular both lines 15a and 15b.
 
J

joeu2004

Arthur Kamlet said:
The thing to do at the time was get the checks reissued
or deposit them in a Schwab IRA. [....]
The checks were, in effect, IRA distributions which
could have been rolled over, but only within 60 days. [....]
if I file an amended 1040, should I treat such
"distributions" as ordinary income like other IRA
distributions [....]
Line 15 IRA distributions. It doesn't matter that
there's no 1099-R.
In particular both lines 15a and 15b.
Thanks, Phil and Art. All makes good sense. I wasn't thinking clearly
before :-(.
 
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B

Bill Brown

AFAIK, the 10% penalty does not apply to a person over 59 1/2 and before 70
1/2.  I'm in between.


I wrote:  "I got checks for similar, but separate settlement

payments received in July 2011".

And I wrote:  "What should I do now, 10 months later?".
There isn't much you can do at this point except report the
withdrawals on an amended 2011 tax return as ordinary income
distributions from your IRA(s). Use Part III of Form 1040X to provide
a good explanation of why you omitted this income and you may avoid
late payment penalties. If you are assessed penalties and interest by
the IRS, you will still have a chance of having the penalties waived
with a good, honest description of what happened.

Those who were not 59 1/2 or older at the time of the receiving those
checks would use Form 5329 to compute the "Additional Tax on Early
Distributions." and to show any exceptions qualified for.
 

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