Class Action Suit settlement check into 72T
L1: Class Action Suit settlement check into 72THere”s a new one to me.
Client is in the third year of a 5 year 72T (started at age 55). She just received a check made out to the custiodian for IRA Rollover account xxxxxxxx. This check is part of a class action settlement from RS Investment Management L.P. Part of the check is for damages done to the fund and part is due to excessive fees paid to the fund manager.
So here”s the question. If we deposit this $500 plus check into an account that is already taking equal and substantial payments, will this bust the plan and will the client owe the 10% penalty on all distributions taken over the 3 years so far? It”s my understanding that you can”t contribute new funds to an IRA when you are taking 72 distributions, but the only place that this check can be deposited is to this account. We can request that they send us a check directly, but that would constitute a distribution and therefore bust the plan. Can this be treated as if it were a dividend? Can we deposit it and just ignore it?
Thanks.2008-05-01 11:56, By: tykemerry, IP: [22.214.171.124]
L2: Class Action Suit settlement check into 72THello tykemerry:
If you think about it for a moment; the IRA had an asset which was a prorata portion of a class action claim against RS. Till now no one knew how to value the asset so it was therefore valued at zero. Now you know, its $500. So the class action claim was sold (so to speak) for which you received $500 in good ole cash. The $500 must be deposited into the IRA; otherwise it would technically constitute a distribution.
TheBadgerwjstecker@wispertel.net2008-05-02 15:38, By: TheBadger, IP: [126.96.36.199]
L2: Class Action Suit settlement check into 72TI agree, and it is best to fill out the class action paperwork identifying your IRA as the recipient for the award. In those cases, the check is made out to the IRA and is handled as a transfer rather than a rollover. For example, this is how I handled the AOL Time Warner settlement, and Chas Schwab requested that “For Deposit only” be written on the back of the check. It was deposited into the IRA that held the shares and did not generate a 1099R or a 5498. Having no 5498 reporting an IRA contribution provides the benefit of not having to explain all this to the IRS. I suspect, however, that several of these class actions are handled differently by the plaintiff attorneys and not busting someone”s SEPP is the absolutely last thing on their minds. Neither is the one rollover rule per IRA account per 12 months.
Some of these checks might be made out to the individual rather than the IRA. I have no idea how many of those will generate a 1099R for some of the above reasons. Problem here is you will probably not be able to find out until after the 60 days is up. In this situation, you will probably have to bite the bullet and rollover the funds if you are eligible, even though it will generate a 5498 and then you will have to take the position that The Badger outlined with the IRS that you had no choice but to rollover the funds to maintain the integrity of the SEPP.2008-05-02 17:17, By: Alan S., IP: [188.8.131.52]