Settlements in an IRA

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?)

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

Reply to
Arthur Kamlet

Reply to
Kurt Ullman

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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?

Reply to
joeu2004

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.

Reply to
Bill Brown

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.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

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" wrote:

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?".

Reply to
joeu2004

In particular both lines 15a and 15b.

Reply to
Arthur Kamlet
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Thanks, Phil and Art. All makes good sense. I wasn't thinking clearly before :-(.

Reply to
joeu2004

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.

Reply to
Bill Brown

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